Editors' Blog

Another first for shell-shocked LBO advisers

Posted 1/06/2007 by Alex Novarese

More cause for horror among conservative acquisition finance lawyers still reeling at the topsy-turvy deal lending that is seeing banks rapidly ditch their traditional rights to secure business.

Research out this week from the Bank of England shows that UK banks have begun lending to private equity houses and hedge funds below official UK interest rates for the first time since comparable records began.

The data shows that average lending by UK banks to non-banking institutions in April dropped to 5.24%, against the then-base rate of 5.25%. The rate was even further under LIBOR – the wholesale cost of money between the banks themselves and traditionally a good deal cheaper than any corporate borrower would get – a full 34 basis points below, as it happens.

To be fair, it is hard to be sure how much of that is due to the aggressive borrowing of hedge funds, which operate a very different model to private equity. And even at 5.24%, banks are still comfortably getting real returns due to relatively high UK rates and the current downward trend in inflation.

But such extraordinary developments will naturally add to concerns that cheap debt fuelling the current wave of private equity-driven deals is being dished out on ridiculous terms as banks fight to win sponsor business.

As with the increasing controversy over sponsor-friendly financing like cov-lite, it is hard to see how this trend can not ultimately polarise lawyers between those acting for traditional lenders and advisers working with increasingly demanding buy-out houses.

More generally, deal lawyers will be wondering if the excessive use of debt won’t yet prove to be the Achilles heel of the outwardly healthy markets when the easy lending finally dries up.

alex.novarese@legalweek.com