Europe’s leveraged loan market is waking up to the profound impact that increasingly restrictive whitelists will have in a more volatile credit environment. Lenders are now struggling to offload stressed debt or take positions in credits that they believe are oversold, market participants say. By limiting liquidity in the loan market, these provisions have distorted price action and will potentially prolong time-sensitive restructuring processes.
Whitelists, which outline the institutions with which lenders can trade the debt without seeking the borrower’s permission, have been a feature of European loan documentation since before the 2008 financial crisis. At their core, they provide a means for sponsors to prevent distressed debt investors from buying up a struggling company’s loans with a view to potentially taking the keys.
If the loans stay in the hands of "par investors" such as CLOs, sponsors take the view that they will be more lenient in times of stress because these lenders are not designed, and in some cases unable, to take control of a business. As Europe’s loan documentation has become increasingly detrimental to lenders in a number of ways over recent years, so the restrictions that these whitelists have placed on lenders have grown more onerous.
It is now standard market practice that loans can still be transferred without the borrower’s consent should there be a payment or event of default insolvency. However, previously any type of default event would have removed the requirement for borrower consent, said Christine Tadros, European managing director of Debtwire’s sister service Xtract Research.
It was from around 2016 onwards that European loan documentation began to see this type of more persistent whitelist, said Tripp Lane, a partner at the private equity and special situations advisory firm Delancey Cove.
Lists have also imposed more restrictions on which investors could buy the loans, with some sponsors even starting to distinguish between specific funds at an individual asset manager.
“We started seeing a lot more restrictions coming in just before COVID,” said one buysider. “We ended up with situations where even our own special situations funds weren’t allowed into the deal. Your CLOs and managed accounts could be whitelisted but your special situation fund wouldn’t be.”
Lists started to include broader language in an attempt to exclude a broad pool of distressed funds.
“‘Loan-to-own/distressed investor’ will be a defined term in the facilities agreement and aggressive sponsors may expand that definition in such a way that even lenders whose credit simply falls into distressed territory are captured by its scope,” Tadros said.
These developments, while openly detrimental to lenders’ interests, did not occur without their consent. As credit conditions remained largely benign for the best part of the last decade and asset managers grew their lending activities and CLO platforms, it became increasingly important to have good access to new loans and maintain relationships with sponsors, Lane said.
“There was also an element of arrogance on our part, because everyone assumes they will know when to sell before you need to sell to the distressed guys,” said a second buysider.
“And primary was fine at the time, so it was like, oh what’s the problem with having these lists?” said a third buysider.
With higher interest rates and a much less certain economic outlook now prevailing, a greater proportion of Europe’s loan universe has fallen to stressed levels. The Debtwire composite of Europe’s most liquid loans has at some stages over the past 12 months been as low as 88.39, although it has since recovered to 94.86.
Many individual loans have fallen much further and not recovered. When prices fall into the 70s or 60s, CLOs would traditionally consider selling the debt.
However, with a very limited number of counterparties to trade with this has become increasingly difficult. This lack of liquidity is having a clear impact on secondary market prices, with small trades in stressed names having an outsized effect on levels and creating “gappy” price action.
“If a guy owns EUR 6m of a loan and decides to sell it at clips of EUR 2m, then each sale could drop the price 2 or 3 points now. That is not normal, but there are no natural buyers,” said the second buysider.
The case of KKR-owned GenesisCare is widely acknowledged to be one of the clearest examples of this. Poor earnings, tight liquidity and weighty leverage have put the Australian cancer treatment provider on the road to restructuring and its loans have collapsed in the secondary market.
A EUR 400m Euribor+ 350bps October 2025 cov-lite term loan B is quoted at 29.64/33 on Markit while a EUR 507.46m E+ 475bps May 2027 facility is shown at 29.57/32.57.
It is debatable whether the lists behind these loans are obviously more restrictive than the documentation behind any other deal done at a similar time. However, the fact that the credit has become distressed and that KKR has acted on its ability to restrict ownership of the debt has brought the issue to the fore.
“No one wants to bid on this because they can’t get settlement,” said the third buysider. “Genesis is the main example where you could probably point to the price being more depressed because of the restricted list. You could say it would be trading in the 40s if it had no restrictions.
GenesisCare is one of a number of examples given by investors, which also include Upfield, IGM Resins, Wittur and Kloeckner Pentaplast, where they say that restrictive whitelists have had a notable impact on trading and secondary prices.
It is not only pricing that the enforcement of highly restrictive whitelists can impact. Many market participants believe that as credit conditions continue to tighten there will inevitably be an uptick in restructuring activity and restrictions on trading may weigh on these processes.
Sponsors assume that, as CLOs do not want to take stakes in the businesses they lend to they are more likely to be lenient as credits become distressed, whereas distressed funds will fight to take the keys. However, in restructuring processes, which are often time-sensitive, some argue that CLOs are not the ideal counterparties for sponsors to be working with.
“The CLOs and banks can sometimes be quite slow and when you’re in distress, that is not what you want,” said Delancey Cove’s Lane. “I’ve advised companies in these situations and it has at times been much easier to deal with the distressed funds who are transactional, decisive, and economically motivated. But sponsors tend to take the view that they would rather negotiate with a par lender like a CLO than with a sophisticated distressed investor.”
Fighting for allocations versus fighting for new docs
As financing conditions become less accommodating to borrowers, given the direction of interest rates and weaker consumer confidence, it would not be unreasonable to expect this trend to reverse. If a borrower wants to access funding, investors should demand the freedom to trade with whomever they please.
But the supply/demand dynamics in Europe’s primary market makes it difficult for lenders to push back. Two senior leveraged finance bankers said that they had seen no efforts from investors to loosen the language around whitelists on any recent deals in Europe.
“We are currently in a supply/demand dynamic which is in the favour of issuers,” said one of the bankers. “When a good deal comes, everyone wants to participate. This gives sponsors power. Investors also don’t want to be struck off the list.”
If investors have to fight to get allocations on new transactions, it means they can rarely afford to hold out because of whitelist concerns. New-money deals, those that represent new loans entering the market rather than refinancing or extending existing facilities, have been few and far between this year. Only around EUR 6.3bn of fresh fully syndicated euro TLBs have been placed year-to-date, according to Debtwire data. During the same period in 2022, there were more than EUR 11.7bn.
Whitelists are also only one consideration among many when investors review a new deal or an amend-and-extend exercise.
“First you push back on the economics; the OID, the margin, the ratchets,” said the second buysider. “Then you push back on the really egregious stuff in the docs like the J.Crews and pick your poison. Only then do you start to think about the restrictive lists.”
Picking your battles
In certain scenarios, however, there may be room for investors to alter the language around whitelists. The vast majority of borrowers that have come to the primary market to A&E facilities over the past 12 months have been performing credits, extending loans that would not have reached their maturity for one, two or three years. Given the limited supply of paper, lenders have stayed invested and taken the improved margin and OID and remained largely silent over the documentation.
The next wave of A&E activity is expected to include more stressed names that are approaching maturity walls and need to push out redemptions before the debt becomes current. With borrowers needing the extension to stave off a significant deterioration in their credit metrics and investors having the ability to withhold their participation, lenders will have greater leverage to demand changes.
“When you have more complex A&E processes, you will see the whitelists get cleaned up,” said the first buysider.
In this regard, one name that lenders have their eye on is the Netherlands-based spread manufacturer Upfield. KKR has been enforcing the whitelist on its asset’s debt and preventing distressed funds from entering the loans, said the first, third and a fourth buysider.
The company has more than USD 5.8bn of senior secured term loans coming due in March 2025 and although operational performance has been improving over recent quarters the borrower’s leverage remains stubbornly high, standing at 7.2x net based on its own numbers for the 4Q22.
“Upfield will have to A&E soon and I can guarantee you that if they need to open the whitelist to do it, they will,” the first buysider said. “The problem with Upfield was that they made it very complex for distressed guys to buy it and I think there will be pushback.”
There are also other related areas where loan investors are resisting sponsors. While whitelists are the norm in Europe, in the US blacklists are a feature of loan documentation. These lists, which specifically name institutions that are not allowed to participate in the debt, have not gained traction in Europe.
“Blacklists – more formally termed ‘Disqualified Lender Lists’ - are significantly off market in Europe – this is a phenomenon more attributable to the US loan market,” said Xtract’s Tadros. “A few very aggressive sponsors have tried to include the ‘blacklist’ concept in the ‘first cut’ of their European debt documentation, but my understanding is that such attempts are regularly vigorously resisted by European lenders.”
KKR declined to comment for this article.