Leveraged finance: an introduction by Allen & Overy

Allen & Overy's specialists give an insight into the associate role in this complex practice.

Practice Overview

Leveraged Finance is an exciting specialty within the broader Banking & Finance practice area. Leverage refers to strategic use of debt capital (i.e., loans and bonds) to achieve higher returns on investment at lower risk to the borrower and its equity holders. A leveraged borrower is one carrying a high debt load relative to its cash flows, to the benefit of equity holders who invest less of their own money to acquire or develop the business.

Leveraged Finance attorneys negotiate, document and advise clients on loan agreements, bond indentures and related contracts entered into to finance specific strategic transactions (e.g., leveraged buyouts (“LBOs”), mergers and acquisitions and capital expenditures) and related activities.

Attorneys in this practice area represent numerous principal players: investment banks, who arrange and commit to provide these financings; private equity financial sponsors, who utilize these financings to purchase target companies or recapitalize portfolio companies; corporate borrowers, who require debt financing for strategic investments and acquisitions or for working capital; and other syndicated debt market participants (e.g., investment funds, alternative lenders, business development companies ('BDCs') and asset managers), who hold the debt until it is traded or repaid.

Leveraged Finance is a uniquely dynamic and multi-faceted practice area. Attorneys in this specialty are exposed to companies in all stages of the corporate life cycle. At times when M&A activity is booming, leveraged finance attorneys find themselves in very high demand, as financial sponsors compete to acquire target companies and investment banks and alternative lenders compete to provide the debt commitments to back those acquisitions. When markets turn, borrowers and their creditors seek counsel from leveraged finance attorneys with respect to the ongoing requirements (or “covenants”) under their debt documents and, when compliance with those terms proves too challenging, amendments, restructurings and bankruptcy-related advice. As a result, the skills of high quality leveraged finance lawyers will always be in demand, regardless of the economic climate.

Practitioners in this area are often well-rounded and well-versed in numerous legal areas, including general corporate law, laws related to mergers and acquisitions and shareholders’ rights, contract law, government regulation, secured transactions and the Uniform Commercial Code, and bankruptcy law, to name a few. Additionally, while strong leveraged finance lawyers develop detailed contract drafting and negotiation capabilities, their skill set often extends beyond an understanding of law and contracts and into the advisory realm, being regularly called upon to opine on current market trends and strategic financing alternatives. This allows leveraged finance lawyers to blend the legal perspective with a business understanding of the financial markets.

Allen & Overy is uniquely placed in the global leveraged finance market. As of the beginning of 2017, there are over 50 leveraged finance partners, 250 banking partners, and 1,000 other banking and finance (including capital markets) practitioners in our firm worldwide. Due to the size and scope of the finance offering at A&O, attorneys in our leveraged finance practice have a breadth of transactional experience that is difficult to replicate at other firms without the scale that A&O offers. With 44 offices in 31 countries, A&O provides its associates a unique opportunity to work on some of the most complex and interesting financings, often requiring A&O’s expertise across multiple jurisdictions.

Recent Market Developments

Leveraged loans and high yield bonds have long been active and robust asset classes given the returns they generate for lenders and other investors despite relatively low historical default rates. The Leveraged Finance industry is dynamic, with the creation of new investment vehicles, the implementation of new regulations, the globalization of the capital markets and other developments and trends creating opportunities for new market entrants and product offering expansion by existing market participants. In the late 2000s, leveraged debt issuance soared with the increase in popularity of private equity investment. Financing for such transactions was usually provided by the traditional investment banks (often referred to as 'bulge bracket' institutions) who agreed to commit to lend to private equity sponsors in return for a fee, with the ultimate goal of selling (or 'syndicating') the resulting debt instruments to other lenders or investors in the secondary market. 

Following the Lehman Brothers bankruptcy in 2008 and the ensuing global financial crisis, as banks faced increased regulatory pressure, including capital requirements and limits on the amount and terms of loans made to highly leveraged borrowers, new market entrants in the form of alternative lender funds, BDCs, and even direct lending arms of private equity firms, emerged. Because many of these new lenders are technically not regulated banking institutions, and therefore not subject to the same government restrictions, they are able to compete aggressively with traditional banks for market share. This increase in competition contributes to the greater negotiating power that borrowers and equity sponsors have enjoyed in the current market climate. It also expands the corporate debt marketplace generally as the new capital sources introduce additional products to distinguish themselves from traditional banks, and existing players innovate to retain market share. In light of this changing landscape and the evolution of the capital markets, including the convergence of historically distinct geographical markets, there has never been a more exciting time to be an attorney in the Leveraged Finance space.

Role of an Associate

Leveraged Finance is a team sport. Transactions require collaboration, and every member of the deal team is indispensable and necessary for the success of the transaction. At A&O, we staff strategically to ensure significant and direct interaction between partners and associates, and among associates of differing seniority levels. Associates are challenged early and often to take on as much responsibility and client contact as they desire. As a result, junior associates in our group tend to have drafting and negotiation responsibilities earlier than in other transactional practice areas.

In particular, Leveraged Finance associates:

  • draft and review commitment letters, fee letters, term sheets and definitive documentation (credit and security agreements), with significant substantive responsibility early in their careers; 
  • negotiate legal terms directly with opposing counsel, and facilitate the negotiation of commercial terms between principal parties;
  • analyze market precedents for latest developments and advise clients as to whether a particular proposal is consistent with “market” terms (i.e., what similarly situated lenders or investors are currently accepting in comparable circumstances);
  • stay in close and direct contact with clients and other attorneys (including local counsel in other jurisdictions), managing communications in order to ensure the transaction is running smoothly;
  • coordinate with various other practice areas across the firm, including tax, environmental, regulatory, sanctions, employee benefits, intellectual property and litigation, among others;
  • on cross-border matters, coordinate with counsel in our foreign offices or our local counsel in other jurisdictions, to ensure global consistency and coordination of terms and documentation;
  • manage all aspects of the transaction process, from overseeing due diligence to maintaining the master agenda and steering the team toward a coordinated and timely closing; and
  • importantly, develop their own direct relationships with clients, both on- and off-deal, which at A&O is encouraged from an associate’s earliest days.

About A&O

Allen & Overy has a market-leading global Leveraged Finance practice that advises the world’s foremost financial institutions, investment funds, corporations and financial sponsors across all types of debt financings. We provide a full service offering for senior, second-lien, mezzanine and PIK debt, cash flow and asset based financings, bridge-to-bond financings, bank/bond financings, high-yield debt offerings, debt buy-backs and leveraged leases and regularly advise clients on complex debt restructurings, workouts, debtor-in-possession financings and exit financings.

Our practice comprises a devoted and highly experienced group of partners, counsel and associates, both in the US and globally. We dramatically expanded our New York team in 2016, further augmenting our existing US banking and finance capability, which is fully integrated into A&O’s unmatched international platform.

To learn about associate life at Allen & Overy, read the Inside View>>