Direct Lending Terms and Documentation: Leverage Covenants, Incremental Financing, Guaranty Provisions

This CLE course will analyze the terms and characteristics of direct loans and how they vary from syndicated loans. The panel discussion will include financial covenants, collateral and credit support typically required for direct loans, and how private equity lenders can tailor loan terms to each borrower.

Direct lending funds have evolved and expanded in recent years and are increasingly able to offer loan facilities that compete with more traditional lenders. Since direct loans are not typically syndicated, direct lenders have more flexibility to provide financing to companies with complex or atypical assets or liabilities. But there are distinct structuring and documentation features of direct loans which finance counsel must consider.

Direct loans may have more customized amortization terms--perhaps an interest-only period followed by accelerated amortization or a payment-in-kind feature where deferred interest payments are added to the principal. Financial covenants are more tailored to the borrower. They will usually include a leverage ratio-based financial maintenance covenant throughout the loan term (instead of the "covenant-lite" approach in syndicated term loans).

Depending on the borrower's future funding needs, a direct lender may offer a delayed-draw term loan commitment as part of the loan package. While syndicated lenders have generally excluded foreign entities as guarantors, direct lenders might include foreign subsidiary guaranties. Both features require enhanced underwriting of the borrower and guarantors and additional documentation not found in syndicated loans.

Listen as our authoritative panel discusses direct lending's nuances and how it can differ from syndicated lending.