Inside Leveraged Finance: Lenders, Sponsors and the Deal in Between

Hello, everyone. Thank you for joining us for today's episode. My name is Shanaya Kapoor. Today, I have the privilege of interviewing Hadrian Survey, a partner at Simpson Tatcha and head of the firm's European private credit team. Hadrian brings extensive experience advising leading lenders and other private capital providers on complex cross-border financing, and is recognised as a pioneer in the European private credit market. In this episode, we'll be delving into Hadrian's career in debt finance, the evolving European private credit market, the dynamics between lenders and sponsors, and his perspective on building a career in debt finance. Hi again, Hadrian. Thank you for joining us on the episode today. Thanks, Shanaya. Great to be here. Super, super happy. Thank you. Before we get into the specifics of your work, we'd love to learn more about you. Could you tell us a little bit more about your journey into commercial law and how your career developed? So, I think one of the key messages I have when I think about my career is how effectively it was not predetermined, but it was a succession of opportunities which I ceased. So, it's obviously a lot of hard work, but also quite a bit of luck. And I think that's one of the key themes of my journey, my professional journey. When I finished up my studies, I initially wanted to do IP. I applied to a law firm, I don't know if we get the time, who told me they could interview me the following week in IP, but had a spot for banking that day, for an interview that day. So, I went to that interview and ended up getting an offer the very same day, and that's how I landed in banking. I then moved on after two years to do an LLM at NYU in the US, and then, following which I joined late time in New York as well in leverage finance for a couple of years, moved back to Europe that a short stint at Sherman Sterling, and then joined White & K's where I was a partner for about eight and a half years. Two years ago, I joined Simpson Tatcher, where I'm based in London, spending my time in between Brussels, where I live and London, where I work. That's so interesting. Beyond the fact that you got your first seat there, what attracted you to leverage finance and made you continue in this specific sector and practice area? As I said, there's a little bit of luck in there. That interview that I was offered to by A&O, I hadn't planned, I seized that opportunity, and I quickly realized how much I loved it. I loved it because I've always been more execution oriented than academic driven. And leverage finance is fast-paced, it's intense, it is also very human in the way you negotiate deals, and so just that combination of almost mathematical precision constructs need to work together in a very precise way, and that is combined with a deeply human aspect, which is in order for a deal to happen, every party needs to feel respected, and needs to feel like it's reached a good deal, a good compromise, and that I really enjoy. And you mentioned that you've been at many meeting firms before Simpson Tacho, what influenced your decision to move to Simpson Tacho and lead the firms European private credit practice? I think in a career, you go through various stages, and every stage builds upon the last one, so when you start, you need to build technical expertise, and so that's what I did. I worked really hard, I built a technical expertise, and then as you move on, you realize that some issues don't necessarily have a mechanical solution to them. You need judgment, you need to be able to summarize an issue to your client and guide in through it, take them by the hand, and tell them, okay, this is your risks, and this is what we think given your profiling, what we understand of what you want to achieve, what we would do. You obviously can't always take the most conservative approach, because if you want to take new risk, then you can't transact at all, right, because any transaction will always involve a certain level of risk. And then, as you further progress through your career, another skill becomes more and more necessary, and that is franchise building. So you start with technical expertise, you progress and go to judgment, and then franchise building, so team building becomes important. That has an inward aspect, and an outward aspect. The inward aspect is that you need to recruit the right people, you need to make those people work together, you need to build a positive culture, and ensure that culture is maintained, you need to create opportunities for others, so that is all the inward aspect, and the outward aspect is obviously none of that has any sort of relevance if you don't have clients, right, so you need to build trust with a number of clients who will hopefully become regular users of your services, who will trust you, who will call you for advice on their most sensitive legal issues. Thank you so much. I was a very detailed understanding of how progress actually works in this industry and what things we should look to as we enter into this career. Looking back, were there any pivotal moments or transactions or even mentors that helped shape your career? Absolutely. I think in a career like I think in life, generally, small moments can have a disproportionate impact on your destiny on what happens next. If I can give you an example, which happened to me, that would be one day where a very senior partner at a previous firm called me right before my holiday to ask whether I could lead one of his deals. It was a massive deal, and my first thought was, gee, this is going to destroy my holiday. What I did was I wanted to see another partner who I was close to, with the hope that she would tell me just decline and go on holiday. You've deserved it. I had worked really, really hard, but that's not what she did. She told me, are you insane? This is a once-in-a-lifetime opportunity. You take it. You're going to build a relationship with that senior partner. You're going to get exposure to great clients. You do it. So that's what I did. In hindsight, it was definitely the right call. Yes, my holiday got destroyed, but I managed to build a relationship of trust with a very senior partner that then became a sponsor of myself. Then also, I got exposure to a really big investment bank. I became friends with a number of members of the team of there who ended up moving on to private equity shops and becoming my first regular clients. So this was definitely a pivotal moment in my career. I think it's also interesting to distinguish between two different types of people, mentors and sponsors. They're not exactly the same things in my view. A mentor is somebody, and you need both just to be clear. A mentor would be somebody who tells you what you need to hear. So in my example, that would probably be the partner I went to seek advice from as to whether I should take that deal who didn't tell me what I wanted to hear, but probably what I needed to hear. A sponsor is somebody who puts his or her credibility behind you and gives you access to opportunities. That would, in my case, probably be that senior partner who gave me the opportunity of leading a deal and then supported my progression within the firm. Thank you for that. I think so far, you've spoken about some really practical steps and tips that young lawyers and even trainees can look forward to when they want to move across different segments of their career and progress through this practice. So thank you for that. Moving on to the next part of our episode today, which is about finance as a practice and specifically Simpson Tatchas finance practice. Could you briefly walk us through the financing aspect of a typical private equity transaction before we get into the specifics of the different players and their roles? So in a typical P transaction, [BLANK_AUDIO] Well, it will typically be an acquisition, right? So you've got two parallel work streams that need to, at some point, converge with one another and lead to a closing. So one is the M&A work stream. It's anything relating to share purchase agreement or shareholders agreement. So anything relating to the corporate aspect of an acquisition. And on your hand, you have the financing work stream which has to do with how do we pay for that acquisition? How do we finance it with debt? The first step when a private equity sponsor is considering acquiring a target, so a group of companies, is that they will decide what's optimal capital structure that target warrants. So how much debt versus how much equity, which will tell you how leveled that asset is going to be? What sort of financing can be a smaller bank financing with one, two, or three banks? Can be a big syndicated terminal in B, which is effectively a credit, which is liquid, i.e., it's traded on the syndicated market and is being held by institutional investors, can be a high bond, which is similar to a terminal in B, but in bond form as opposed to loans, or it can be a unit branch, or another private debt solution. And why don't I explain a little bit what private credit is at this stage? So private credit is an industry that has emerged or really grew following the great financial crisis. And what it is, it's effectively bespoke loans made available by institutional investors. So pension funds, sovereign funds, family offices, and so on. The strategy of which is to make loans as opposed to invest in equity, and those loans are bespoke, bespoke in the sense that they're being negotiated on a sort of case by case basis between the lender and the borrower, just less of a standardized market than if you look at high bonds, for example. And those loans are then not typically not traded, so they're being held by the private credit fund who made them available. So that is the essence of private credit. The core differentiating factor of private credit is probably two things or three things. Institutional nature of its investors, so institutions making the money available, bespoke nature of the loans, and the fact that they're not typically traded. So the lender keeps those loans on its books. Going back to your initial question, what is the typical timeline of a PE transaction? So the PE sponsor will look at how much leverage I homage debt, a particular target is able to withhold. It will then decide what high level terms it's looking for, so for that particular structure, what sort of pricing it's looking to get, flexibility, anything specific, it will then reach out on the basis of a short summary of what it wants to a number of, let's say, private credit funds. Those direct lenders will then provide terms respond to what's being requested. The sponsor will select a subgroup of relevant lenders, will then negotiate a term sheet, which is a summary of a more extensive summary of what the financing will look like. A commitment letter will be negotiated, and the commitment letter will effectively say that the lenders will show up with the money with the financing on the day the M&A transaction will close. And a fee letter will also be entered into which will specify the fees that the sponsor, the PE sponsor, will pay the lenders for making the financing available. Just one critical aspect of this whole process, and that is funds certainty. Sellers want to make absolutely sure when they enter into exclusive negotiation with a potential buyer that the financing will be available. So when a sponsor makes, submit a bid to buy a specific target, in the vast majority of cases, that bid is not subject to a financing being available, which means that the buyer takes the risk of the financing not being there on closing, which is why the PE sponsor will want very robust documents being entered into with its lenders prior to submitting a bid, because it wants to make sure that the financing will be there. Once a sponsor then submits a bid as being chosen by the seller, we negotiate what we call the long form documents or the credit agreements, which will specify in a lot of details what the financing is, what the borrower is allowed to do going forward and so on, an inter creditor agreement which will specify the rights of the various creditors, right? And then security documents, which will secure the financing that is being made available. And then at closing, the money is being made available, the purchase price for the target group is being paid from effectively two sources of funding, equity from the PE sponsor and financing from the lenders. And from that moment onwards, the financing kicks in and all ongoing reporting requirements and so on, become life. - Gora, thank you for that detail breakdown. And you mentioned all these different players and these different work streams. In terms of the roles of these different players and the roles of lawyers with regards to these different players, how is advising a lender differ from advising a sponsor and what drew you to specialize on the lender side? - So either of building a lender side practice mainly by coincidence initially, many of my friends and contemporaries at the time were leaving investment banks to join direct lenders, credit funds. And those friends ended up being the first to trust me and send me work. And through words of mouth and other things, you end up doing more and more lender side work and at some point you decide that yes, it's what you're gonna keep doing. And I tremendously enjoy it. So now representing lenders or P sponsors is effectively two sides of the SIM coin. Sponsor wants to make sure one financing is available to pay the purchase price, second that it has the flexibility it needs to achieve its investment to deliver its investment strategy. So it wants to make sure that it doesn't need to go back to its lenders every couple of weeks to get a waiver or to get some sort of permission or from its lenders. The lenders on the other hand want to make sure that the sponsor stays within the boundaries of the business plan day in the road. And so they want to make sure they can step in if risk increases outside of what they thought the risk for that specific deal would be. And so that's why we're gonna get to that a little bit later. That's why you have covenants, that's why you have reporting obligations on the company, that's why you have financial covenants, even of defaults and so on and so forth. - You mentioned that among lenders, private credit is obviously one specific type. From a legal perspective, what makes working for lenders in the private credit space during these transactions particularly interesting? - I think it's a couple of factors. One would be its direct lenders are very concentrated in terms of decision making. So you're talking to a few people, two or three people, usually at most. within the specific direct lender that you're working with, who can call the shots and make decisions that I tremendously enjoy because that means things can go really quickly. Second, the direct lending community is multifaceted, right? Each direct lender has its own culture, its own investment strategy, its own LP base, so its own investors within the fund, and the sort of deals that the specific investment committee will like to do. And you have to know a direct lender really well to be able to advise them properly because the advice you give to a specific lender may not be the one you give to another one because that other lender may be, for example, super focused on document protections, whereas another will be much less focused on that, but will be, for example, more focused on making sure that its relationship with the sponsor stays as friendly as possible. One last aspect which I also enjoy is the bespoke nature. Private credit is a bit less precedent-driven than some other products, so you can always come up with solutions that are unique to the specific situation you're trying to address. That is intellectually challenging and interesting. Right, and in terms of the legal seating aspect, which you did touch on, but just to get a clearer understanding of the bargaining power that these different players have, how do that differ from a sponsor and lender in terms of their sane and negotiation? I think that is a really interesting question. So I don't think you can say that these sponsors have more power than lenders or the other way around. What determines the bargaining power at the most basic level between two parties is optionality of each party, and that optionality will depend on a number of factors. The first one is if you're looking at the P sponsor, the quality of that P sponsor and the volume of deals that P sponsor generates. So if you're looking at a really big sponsor that has a very successful track record going back 30 years that generates 15 deals a year, clearly that is going to be more attractive to lenders than a known sponsor that has no track record and that will generate a deal effectively a fee event for lenders once every three years, right? So that's one aspect. Second aspect is the quality of the borrower, right? So is effectively the target that the P sponsor is looking to acquire in a good industry? Is it going to be highly livid? Clearly the higher the leverage, the risk here it becomes for lenders and typically fewer lenders are going to compete for that specific financing because it's getting too risky. Then you have transaction-specific elements such as speed. Clearly, if you need to close a deal in, say, 10 days as a sponsor, you can be talking and negotiating with 25 lenders. You're going to, you know, mechanically have to restrict yourself to just a few and they will feel. Lenders will feel that they have more bargaining power because they're fewer of them. Another example of a transaction-specific element that can limit competition is in the context of public takeover bids. You've got in the UK, for example, what's called the rule of six, which limits to six the number of parties that can be contacted, pre-announcement of the offer to ensure confidentiality that will limit the universe of lenders that are competing for a specific situation. And then I think a last aspect which I'm thinking of which has an impact on bargaining power is institutional pre-existing institutional relationships between a sponsor and a lender. When a given sponsor and a given lender have entered into, say, 10 deals in the last three is chances are that deal will look like the 10 previous ones and people will just stick to an established precedent with, yes, you regard to the specific situation being financed but you're, you're going to tend to stick to what has been done before and that will limit about bargaining power on one or the other side, right? Right. And in terms of where lenders would be a little bit more stricter on or maybe a bit more lenient on in the specific negotiation terms, where do the most important negotiations typically arise for a lender? And how do they balance that with being commercially competitive but also protecting themselves and by having strategic collaterals in place? Yeah. Again, super interesting question. I think there are, I'd say, probably four areas which lenders tend to focus on. One is how much risk can enter the structure. So as I said before, lenders, the leverage finance universe, underwrite a business plan and look at future cash flows of the company to pay interest. So they want to make sure that the risk that's in the system in the borrowing group stays comparable to the risk they in the road. And to achieve that, a number of covenants will be negotiated, which will limit the sort of acquisitions that the group can make. How much additional debt the group can raise. Second area of focus would be how much assets can leave the system. So lenders are going to look at dividend capacity. They won't want too much dividends to be paid because any dividend is effectively money going to the peace sponsor and leaving the borrowing group that is there to pay interest and repay the debt eventually. Or what security can be granted to other lenders in the future. So that's sort of considerations. Thirdly, I would say when do lenders receive control, control rights or monitoring rights? So a typical deal will have a number of will give lenders some monitoring rights. So lenders will be provided with financial statements on a regular basis. They will also be a financial covenant, which is a provision that will say, at the end of every quarter, for example, what level of leverage may not be exceeded. And if that level is exceeded, which is what's called an even of default, and the lenders can step in and force the sponsor to either put more money or lose ownership of the borrowing group. And jumping back to the lenders that you mentioned before you said that there would be multiple lenders in a specific transaction, obviously for monetary reasons. In terms of Simpson Thatcher's role in such transactions, would you advise one specific leading lender or would you come in for the entire lender group of let's say 25? Yeah, again, super interesting. So it's just a bit of a culture aspect that I play here. As I said, when I explained the typical timeline of a p-deal, just a moment in time where lenders are competing with one another to provide all or part of a given financing for a given sponsor. And then prior to the bit being submitted by the sponsor, the sponsor decides which lenders will provide that financing. And so a club of lenders is then created that will provide make the financing available. During that stage, there are a number of lenders competing with one other to provide a financing. In the US, the approach that's generally followed is each lender gets its own partner. So say Simpson Thatcher will make a separate partner available for each lender. And then when the club is and the sponsor has decided which lenders will provide a financing, one need partner takes over because at that stage, just no longer a conflict of interest between lenders. In Europe, we do it differently. We do what's called treatment. in the head, meaning that a given partner, say me, will represent four or five lenders during the competitive stage, but will not share information from one tree with another tree. So I effectively don't tell other lenders what a given lender has told me or what its comments are on the documents or what it's pricing is or and then obviously when the club is created then it's you know all lenders are being pulled and and Europe is in all of them and trees in the head no longer applies. Now just tell there's still situations where even Europe several partners are warranted and that is where you have different classes of lenders say in a unitrange you have the direct lenders providing the unitrange and then typically banks providing what's called the super senior revolving credit facility which is the sort of company credit card. They will, the RCF lenders, the super senior revolving creditors will be represented by a different partner because there is a conflict of interest when it comes to rights of the different classes. Thank you for delivering into that. It's interesting to see how these conflicts are very carefully handled both in Europe and the states. Speaking again of conflicts of interest, given that some private equity sponsors themselves have private credit businesses, how are transactions approach when the sponsor and the lender are affiliated? Yeah, so again culture plays is very important here. Having a lender that is affiliated with a peace sponsor can lead to tremendous efficiencies because chances are that the credit committee of the direct lender will tend to be more educated about a certain borrower if and may like it more if it is an asset that's the buyout arm of the same asset manager is considering buying. But obviously at all times the two arms so the buyout and the lending arms need to remain indefinite because their investor base will be different. Their LPs will be different. There are several approaches depending on each specific asset manager at the stricter end of the spectrum. Some assets, some asset managers tend to view the world in a way that if the buyout arm is looking at buying an asset the lending arm may not look at the same situation either for the buyout arm or a different bidder a different peace sponsor wanting to buy the same asset. Other asset managers will allow the lending arm to finance competing bidders so other peace sponsors but not the affiliated peace sponsor. And then you have those asset managers allowing the lending arm to finance the buyout arm but typically that will only be as a so-called minority lender or lender taking only a part of the deal after that terms have been negotiated by an unaffiliated lender which will effectively crystallize the market pricing and market documentary conditions which will then be sort of taken on a take take it or leave it basis by the affiliated lending arm. So what to be clear what you would typically not see would be the lending arm anchoring a deal for the buyout arm. So Cajun you have advised obviously on multiple significant cross-border finance things and you've gone through them the structure of them in great detail in terms of where the industry is at right now and what trends are currently going on in the market would you be able to comment a little bit on what's shaping the European leverage finance market at the moment. Sure, I would say a few things. One would be credit bifurcation. So lenders are more and more focused on making sure that they're lending to borrowing groups that they're comfortable with. And I'm saying this because in the past there was sometimes a bit more of oh if a given sponsor is trying to buy an asset because we have such a great relationship with that sponsor we will try to finance that acquisition with perhaps a bit less consideration for the target and what the borrowing group is actually how how credit worthy the borrowing group is. That is no longer the case now lenders tend to be very focused on the quality of you know the borrowers they finance. A particular example of this is the software industry where the market's trying to dissonate between two types of softwares. Softwares that are going to remain very successful and profitable in a world where AI is taking over. And softwares that are going to be rendered irrelevant or less relevant by AI. Another trend would be convergence. And that is the direct lending market used to be focused on the mid-market so mid-size companies. The syndicated market used to be focused on or it is still to a certain extent focused on the more large gap space. But today you see that direct lenders have raised massive funds and are no competing against the syndicated market or cooperating with it where direct lenders would provide a specific piece of a broader financing which includes a syndicated some would be for example. Capital structure optimization would be another trend where in a world where exits are slower. Sponsors are more focused and before on making sure that their financing are as flexible as possible and that may involve including a portability feature whereby the financing can be rolled over and maintained after a change of control. So when a different sponsor buys the group of companies that is being financed or that can be anything relating to fund financings so there's been a massive trend called net asset value financings where P funds would borrow backed by their portfolio companies to pay their LPs some distributions before actually selling their portfolio companies. And then a last trend that I'd like to mention is the focus on downside protection and that is where lenders are trying to ensure that they cannot be played against one another when they enter into a deal. And that actually is a great segue into an Xbox. So in terms of your own interests in this space in terms of the transactions that you've worked on is there a particular transaction that has stood out to you either since that you're all before and why? Yeah, an example of a transaction I found particularly interesting was that specific deal where initially we were going to negotiate syndicated term to be it was pretty much all documented ready to go but the market just the syndicated market just wasn't good enough at the time. So we flipped to a bridge a bank bridge whereby the banks that were going to underwrite the terminal and be were instead going to provide a bridge that was going to be refinanced with either a TLB or high bond and then midway through all of that the company said hey I want to do a P2P so a public takeover bit so I need a committed financing within like a crazy timing I think it was like 10 days. And so the banks just didn't have enough time to get ready. So we flipped back to a unit branch financing to finance the P2P. So in the course of let's say I'm going to month and a half, we papered three different deals to cater for effectively updated circumstances in which the borrower group was finding itself in. Thank you. I think we can move on to the final segment of our episode, which is advice for students, which tends to be probably the most asked for. For students interested in law and even for those interested in finance law, what experiences would you recommend pursuing during university or even after? Look, I think university is a great time for experimenting, you know, as many new things as possible. Time for specialization comes probably a bit later when you join a law firm and usually relatively quickly you're being asked to specialize within a specific area of law. At university, I think you should keep an open mind and try different things. I don't think it's necessarily prejudicial to take, say, anti-trust classes if you want to do finance. I think it's totally fine. Obviously grades are not an important. I think it's also highly relevant to spend a bit of time into more managerial activities like yourself, you know, as being involved in a student's group or a mood court or things like that to show managerial skills, organizational skills. And then obviously internships, right? They're quite important. They allow you to first of make sure that universe, the law firm, the world of law firms is something that still attracts you and that also allows you to build connections with lawyers that may then later on help you or even hire you. And in terms of your own experience, working as either a partner or a senior associate across various big law firms, you've obviously interacted with a lot of junior lawyers and trainees. What, in your opinion, distinguishes an exceptional trainee or junior associate in finance practices or in the commercial legal sector in general. A few things. Ownership is absolutely key. So not limiting oneself to the specific task that's being asked but seeing the broader objective. It's clearly challenging when you start because you have no clue what the deals look like, what the timeline is, so it can be quite stressful. But always trying to put things into perspective and understand how the little piece you're working on fits within a broader, you know, universe of things that need to work together. Second, I'd say attention to detail. I don't think I need to elaborate too much on that but that's quite critical. And then I'd say thirdly reliability. If you say that you're going to deliver a piece of word by a certain time, either you do so or if it doesn't work, if it's not going to be possible, that's fine, but then you need to speak early. The last thing to do is to keep your head down, hide, and then at some point, be asked, "Hey, where is it?" And it's in fact nowhere near to being ready. And finally, if you could give one piece of advice to students hoping to build a career in commercial law, specifically in the UK and Europe, what would it be? I would say, and that ties back nicely to how we started this conversation. Be in the good sense of the word opportunistic, be open-minded, and don't wait to be completely ready before taking on a challenge. Opportunities show up in very unexpected ways. Usually, when an opportunity shows up, you're going to think, "I'm not ready for it. It's not the right time." It can be for reasons related to work. I'm not experienced enough. It can be for reasons related to your private life, which is perfectly fine, but keep in mind that no or very, really well an opportunity pop up at exactly the right time. So pursuing an opportunity involves risk, go for it, and over time, you'll see that it pays off. And I also say just a way to emulate opportunities, and that is working hard, building connection with people. So opportunities don't show up by sheer luck. Luck is a factor, but that's not the only one. Your work and your connections play a critical role as well. Thank you so much for today, Hadrian. Thank you for joining us and sharing all of your experience and insights. I think our listeners will definitely enjoy learning not just about Simpson-Batchers practice, but also how the different components of a financing transaction of the different players come together. Again, we really appreciate you taking the diamond. Hopefully we look forward to seeing connected and perhaps even having you back on the broadcast in the future. Sure. It was a great pleasure to be here. All the more so that my partner in life is an LSEL, and so I was super happy to be here.