Hello, and welcome to the Credit Edge Weekly Markets podcast.

My name is James Crombie.

I'm a senior editor at Bloomberg and I.

Made in Chessin a senior analyst and head of Credit Research Europe for Bloomberg Intelligence.

This week, we're very pleased to welcome Sabrina Fox, founder of Fox Legal Training and former head of the European Leverage Finance Association.

How are you, Sabrina, I'm very well.

Thank you so much for having me.

And Sabrina spends a large amount of time talking to lev finn market participants, educating on legal and covenant risks, something that we've been talking a lot about on our podcasts in the last year or so on names like how to cease?

Isn't that right?

James, Yeah, that's right, And we're delighted to have you here.

Sabrina, thanks so much.

Before we get started, I just want to say credit markets are looking pretty complacent at the moment, with junk bonds trading ever tighter as demand for yield rises and supply of corporate debt dries up.

Companies are taking advantage, however, rushing to reprice tens of billions of dollars in leverage loans and high yield bonds so called liability management exercises are meanwhile getting ever more aggressive as those with too much debt try to buy some time to turn things around.

The situation in Europe doesn't seem as extreme as what we've seen in the US, where there's the sense that some of the law firms and other advisors in those deals are taking a bit of a pause, fearing reputational risk if they push too hard.

But Sabrina, before we get to the covenants, first of all, on the rush to market, what's your take.

Why is everyone trying to get deals done now?

And is the risk being properly priced?

Well, I leave the question of pricing risk to the experts.

I have my own views about that, but I'm not put in that position.

I certainly don't envy them.

It's a difficult market right now.

There is such a you know, a rush to get things done.

Part of that is because the windows can be shorter than you might predict.

They're particularly unpredictable leaders across the world that can cause markets to shut within a day, which we saw recently, and I think that has caused you know, bar wars to become more and their advisors to become more opportunistic and get the deal done while they can, which of course does then squeeze lenders ever tighter.

Whilst they you know, they want the deals to come and they've got the cash to deploy, they've also got tighter timelines during which they have to absorb and digest pages and pages and pages of documentation that they are now seeing before their very eyes the consequences of these additional flexibilities because of the enemies that are happening.

So we're in this very unique time in the market that I have not lived through before, where you see both negotiating for you know, flexibility that seems to be getting ever wider as if there is no limit to it, and alongside the actual cost that this results in due to the liability management exercises and also restructurings and bankruptcies and et cetera.

It's kind of all playing out before us.

And you would think one would cause the other, you know, would influence the other to some degree, but it really doesn't seem to be the case at all.

I remember early in my cell side career, we used to have weeks of a leading into a new issue.

We'd be writing new issue research and going around and seeing clients and talking to them about the new issue that was coming some way down the road.

Now it's all done and dusted in a day.

The investors that you speak to, how do they cope with that, particularly when it's a new name that they might be less familiar with.

I there's a lot of heavy lifting that happens, and it becomes the best you can do under the circle ccumstances.

It's supported.

They do have access to resources that provide summaries on things, but even those providers I know, having worked for them, struggle with the timeline, so those summaries might not be out in time for lenders to make their decisions on that basis.

So no matter how excellent they are, if they don't come out in time, they're not really going to help folks make decisions.

Which is why Fox Legal Training is offering training to bring lenders and other market participants up to speed on how to review documentation quickly.

And it's actually something that I take great pride in doing and in teaching people how to do because it is actually possible.

And I have lots of videos on YouTube for Fox Legal Training where I do just that I take a deal and I say, Okay, we're going to go through and look at it right now, and it could be the first time I've seen the deal.

So I'm taking people through step by step.

Okay, this is how I would do it.

But the biggest obstacle for most people is actually lack of confidence.

They don't believe that they can do it.

They believe, because they're not lawyers, that actually this legal documentation is too complex or somehow outside of their ability to grasp.

But it's just not true.

I want to get a mug on my desk that says covenants are complicated, but they're not rocket science, because that's that's the reality a contract.

Once you learn how it's created, you know how it's how it's put together, and how to navigate it.

It is actually designed to be navigated.

It's got a table of contents, it's got to find terms.

It tells you how to interpret certain words.

So if you can get a basic sense of how to do that, and we've heard this from our clients, the process does get easier and it goes a bit faster.

So credit analysts can focus on what they do well, which is analysing credit.

But I think you know, to Aiden's point, you know there is such volume coming through.

We've seen over sixty billion dollars worth of just leverage loans in the US coming in one week, which is you know, very very unpresent.

I mean, it's not common at all.

So even if you are confident, I'm confident I can get through this, but I haven't got the time.

What do I do you read Bloomberg Research.

James, I think that I think that's why you're starting to see some sort of specific terms come in that lenders are requesting in documentation, like LEM blockers that go to the heart of some of the most aggressive lemies that we've seen.

Most notably, I would say the omni blocker, which is an an anti lem language that applies in a number of different circumstances, in which I wrote for the Ft quite passionately that they should be used in every deal, that in my ideal world, every deal has an omniblocker.

But it's it is a way to perhaps guard against the worst excesses of the potential future outcomes, and so I'm not surprised to see that the appearance of these types of protections has increased.

It's the natural evolution of the market up to this point, I think.

So break it down for as omniblocker.

You might have already lost some listeners there.

So what does it actually mean?

Basic terms?

Yeah, okay, so on the meaning you know, kind of overall multiple it goes in the document.

It basically says that the barber will not use its terms to structurally or effectively subordinate lenders.

So it won't use the terms it's negotiated for things like priming debt capacity or you know, drop downs to opportunistically rejig the capital structure to the disadvantage of some creditors over others.

So it is taking into account a sort of an umbrella protection overall whole range of different potential ls which allows for maybe some peace of mind.

You know, it's not perfect.

No one of these protections is perfect, but it is better.

I'm certainly better than nothing.

Is it actually a phrase that would show up in the documentation when I see a new debt deal coming through?

Is that how easy it is to spot?

No, it wouldn't be that easy.

I think you could search for liability management and you might get there.

I'm a big fan of control f so I'm constantly giving my clients control F hacks for things so that they can get to the you know, the juicy stuff quickly.

Yeah, I think that will probably get you there.

And Alloway's using other phrases, other terms to avoid being spotted in these documents.

I don't think they are actively true.

I know this, Maybe people will disagree with me, but I don't think they're actively trying to hide things, you know.

I do think it can be hard to find things.

And of course, when you talk about the word loophole, the whole idea is that it is a way of getting through what would be considered an established protection.

So, yes, there are loopholes, but if you know where to look for the protection, then you know where to look for the loophole because it will be more or less in the same place.

And it can be found with a control F search on the document.

I control F can do a lot, definitely, But I think also having a general sense of how these documents are put together really helps.

Once you've done that, you put in the work to get that foundational knowledge, then the fact that you're looking at the documents day in and day out, you begin to see the patterns, which is where you know, having looked to probably thousands of deals, now I feel like I've got to where I sort of know.

Even if you tell me which law firm is you know has written the deal, I could probably tell you where the bodies are buried.

And presumably you need to know a little bit about the company as well, because if company, for example, allows you to or allows the issuer to exclude certain subsidiaries or assets from the restricted group or move pieces around, you need to be able to do your due diligence on what the corporate structure looks like and where the profits are coming from.

Too, right, Yes, that's right, And that's what I call point A.

So whenever I'm teaching covenants to anyone, I say to them you will be delighted to hear that the first part of your analysis has nothing to do with covenance, and in fact, probably the last question you ask yourself won't have anything to do with covenants, because it's the question is what could the bar we're do, What would the bar were be willing to do?

And how bad would things have to get before they would be willing to take advantage of some of this flexibility.

But the first question is absolutely you know, capital structure, basic stuff.

Who are the lenders next to you?

Do they have some advantage?

For example, the supersede your RCF or an earlier maturing bond or facility that has your you know, temporally is senior to you.

And then how much and where and who who has become very important we have seen in recent years.

You know the fact that there are certain lenders who have raised funds specifically to invest in liability management exercises and opportunities tells you all you need to know about the importance of the identity of the other lenders who are sitting alongside you.

And then of course, yes, who is the sponsor, what have they done in the past, Who is the barrow or what has it done in the past?

What you know?

And then you go into the support the credit support.

What is your collateral?

What unencumbered assets are available?

Is there anything of value that the borrower could offer to a third party lender to entice them into the structure.

What's your guaranteur coverage?

If you're in Europe, how much is that guaranteur coverage really worth?

Because of all the local law complexities involved there and that entire analysis there is no covenant related information in there at all.

It's just a basic first step.

So now you have point A, and once you have point A, you can analyze for point B, which is to consider if things got difficult for the bar where if they were painted into a corner and they needed to look at a way of dealing with the capital structure without dealing with their lenders, what could they achieve?

And I always suggest, I'm not sure how many people actually do this, because it might be kind of depressing, but I always suggest max out all the secure deck capacity, max out all the dividend capacity, investments and unrestricted subsidiaries, and then look at that business and decide if that's something you want to be involved in.

And do you think there is enough information in documentation these days or do you think, particularly on the business side of things, that it could be more information or there's anything particularly that we miss out.

I don't think the issue is information provided at the time of the offering.

I actually think there's good Actually they're good regulations around that which are kind of followed in terms of market practice in Europe as well, you know, having been kind of originated in the US, and folks do not want to get sued for misrepresentation or frauds, so there is there are some other protections in place.

I think where you get it gets tricky for a lender is the ongoing information.

And there are of course contractual requirements around borrowers being required to report certain things, but as with the rest of the covenant package, those contractual requirements have also been watered down over the years, and I would say the biggest glaring omission in the whole picture for a lender is something that was never required to be reported in the first place, but is a more critical piece of information now than it ever has been, and that is covenant capacity.

How much is actually there?

How much could the barrower use for a drop down or priming debt capacity?

And because these calculations are very complicated, and also barrowers are the only ones with access to all of the information that they need to conduct the calculation, it would be a huge win for the market if they were to report it.

But they wouldn't do that, and there are a number of reasons why they wouldn't do that.

Barbers wouldn't want to be held to one number.

They will always have a range and if you asked two law firms to give you a calculation of covenant capacity for a barrower, you would get three numbers because two of the lawyers and one of the law firms are not going to agree.

So it is notoriously difficult, but it would be a very useful exercise for barrowers to they provide even for example, their build up basket capacity.

There are some borrowers in the US who do provide build up basket capacity numbers if they are offering a follow on deal and they've got built up capacity there.

And this is just for those who don't know what that means.

This is for paying dividends, investing in unrestrict subsidiaries, you know the restricted payments covenant, which provides for flexibility based on usually fifty percent of a consolidated net income, and that builds over time.

And because this number is not required to be reported and there is no market practice around it being reported, it is it is a big blackpool of information.

And I think Altis France is the perfect example of a barrower that was able to use that lack of information around that number and around the barrower's ability to utilize that capacity very much to its advantage.

Since you posted up to bring altase huge story for us, and Aiden was all over it with his great research as well.

But what did we learn from that, what precedents was set, and what impact does it have on the wider market.

Yeah, so I think there were a number of lessons.

One of them is co ops can be very useful.

It was one of the situations where the lenders organizing into a co op agreement was a really helpful way for them to avoid the worst of these sort of onslaught in the negotiation and divide and conquer is much easier when lenders aren't organized, So that was really useful.

Definitely a massive lesson to take away from it is that understanding how to read the docs is really important.

It was a sort of moment where I thought, well, this is I really feel for the lenders here, but also if there was ever a better example of a time when it would have helped to know how the docs work, this is it.

And it felt quite justifying from that respective because of the specific term that they used and the fact that this this there's usually conditions.

There are usually guardrails in place to protect this giant bucket of cash from being able to be accessed and often require the borrower to test a leverage ratio for example, and that requirement specifically was not present in the case of Altees.

So that is a huge lesson as well.

Reading the docks and understanding the docks is actually really important.

It gives you a you know, kind of competitive edge.

Maybe you wouldn't have traded out at that moment, but maybe you would have known that there was a possibility for this to happen, and then you would have been able to make a more informed decision.

Do other borrowers try and mimic what went on?

There were the benefits to Eltis from, you know, the way they structured things and the way that they did their documentation.

There definitely was Altis Friends was a name that I covered for a long time, so I actually want how they were able to craft this provision over time and to ensure that it was always backdated.

And it was a risk that I flagged a number of times as a covenant analyst, just saying, you know, I remember there was a particular bond that they refinanced which unlocked a whole load of value for them due to it kind of having one of the leverage ratio requirements that fell away from that point on.

So from that point when that deal was refinanced, this suddenly this capacity was available to them.

Up to that point, I was arguing that this bond was a really great deal because if they ever wanted to use that capacity, that was the only bond that would have, you know, a consent solicitation potentially used to amend it so that they could get to that capacity.

So I think it's it's unusual that you see backdated builder baskets to that extent, but I think that now that it's been done that way, there is definitely more of a foot focus on it, so lenders are aware, and it does often take big situations like this for lenders to see the potential damage that one provision can do.

And provisions these days, they are drafted in a way that they are very much departures from reality.

They do not reflect the bar wars economic reality, and that to me is one of the biggest red flags because you're seeing provisions that allow specifically builder baskets to only go up.

So normally they would be measured from fifty percent of consolidated aat income, but they would deduct one hundred percent of losses and they could go below zero.

That was the standard formulation, but in these days the numbers only go up fifty percent CNI and then maybe there's a zero floor, which means that it will never go below zero.

Once it hits zero, it doesn't go below.

But there are also new versions that will not count negative numbers at all, so literally the numbers never go down, and that creates an kind of alternate universe like La La Land that we're operating in, where the numbers don't match the performance of the business, which to me goes against the fundamental nature and purpose of these covenants in the first place.

But of course that's what's going to happen, because the negotiating power has then in the hands of the folks who want more flexibilly for a long.

Long time and sorry, build a baskets can explain what they are to our broadly listenership, Yes.

Absolutely so.

In a typical Hyo Vondon also leverage loans, though they take slightly different formulations in terms of the calculation.

There is a basket which basically it strikes a bargain between the highly levered issuers of the world and the lenders, and it says, Okay, look, we don't want you paying dividends, repurchasing your own stock, investing in entities outside of the credit group, leaking value.

We really don't want you to do that, but we realize that sometimes you will.

So we will let you dividend out fifty percent of your cash profits, and we will offset that by losses, and not fifty percent of losses, but one hundred percent of losses, because if you make a loss, you need to take responsibility for that.

Basically, so this basket starts essentially a zero on day one, and then it builds over time, and it allows the private equity sponsor or borrower to take some money off the table if they're making profits.

And I remember learning that when I was a baby lawyer and thinking, actually, that makes sense to me.

This is how you allow for some give and take in a contract, and there's a real sense of balance there.

But that balance is gone because these provisions now just completely ignore losses in many cases, so borrowers don't have to take responsibility for that anymore, and they only get the benefit of the profits, which they can then use to pay dividends to move value outside of the creditor group.

To repay subordinated indebtedness.

There are all sorts of you know, just additional ways that value can be leaked which don't reflect that fundamental bargaining agreement that yes, you can take fifty percent the cash off the table, but you need to leave fifty percent of the profits in the business.

Yeah, I would definitely echo the call for more detail on where companies stand on some of these calculations that are in the documentation.

It's a nightmare for US self side analysts as well trying to work out where a company is against against some of these targets.

With the lack of disclosure, even when we ask, we don't always get the information from the companies that are a bit bit scared to provide it.

One of the other issues I think has been non ir forr US definitions of financial terms, some like SBB might be as supposed to child for that one.

What do you think can be done to standardize or better clarify some of the terms for whether it's net debt or just coverage or whatever the calculation being used is and is that on investors' radar a much more post SPB to try and get a better definition of what it is that the company is being judged against.

I think that there is a distinction between what the financials as they're reported and the financials that are used in the covenants.

And IFRS Foundation does great work around ensuring that there are standard formulations and understandings of the terms and you know in the financial measures that need to be reported, but in terms of the covenant calculations, it's the same issue that you have with all of the other types of erosion, and that is that if standardization doesn't benefit those with the negotiating power, then standardization will not be a focus willing buyer willing seller, despite all of the other dynamics involved, of course, because of their being one negotiating against many.

The nature of the market and the way that most market participants want it to stay is that there are no regulations around how you contract your agreement.

Now, there are organizations like the European Leverage Finance Association, which I was formerly at the head of, that also put out great guidance around transparency and disclosure and ensure that market practices stay at a high at least market practice guidance stays at a high level.

But ultimately it's down to the individual market participants and until something blows up.

As you noted, there's potentially not as much focus on that as there could be, but that could change.

If lenders want that to change, then they come together and they make that decision and they do their very best to affect that change.

And I think the LME blockers are a good example of where that has been a successful a successful fight.

Though they aren't panacea.

They don't solve for everything.

They are there, and there are more of them, and they do in their own way prevent against some things.

But it really does require a concerted effort from lenders to hold the line, and that does mean often there's blood on the streets.

It doesn't seem like there's any incentive to hold the line that at this point, given there is a lot more demand for credit product than there is supply, and you know a lot of that supply has been taken away by private markets as well.

So you know, I could read the document and I can spend hours looking for these scary terms, but still I've got a ton of cash I just got to put to work.

You know, I might just turn the blind eye.

What stops it turning?

I do think as well, that all.

You can't kind of put all lenders in the same bucket.

They have different strategies.

They can just side to trade out of the more liquid names.

They have options even after they buy the deal.

But I agree with you that the negotiating dynamics have not changed, and i'd like to I'm probably not the only person to use this phrase, but it's like a teflon market, like nothing really sticks, even Liberation Day, and then it was backtracked and then everything's like, okay, cool, that's fine then, And I just I've never seen anything quite like it.

There are it's something like four or five different macroeconomic events happening in the world right now that a decade or two ago would have just one of them alone had a bigger impact on the market that the aggregate of them is having now, and it makes it very difficult to understand, you know, what comes next.

I don't envy the lenders in this position.

I mean, meanwhile, the US IG market spreads the tiers into thirty years or something, and it just seems to get tight in despite all of that macroeconomic risk that you rightly point out.

It is, as you use the phrase earlier, Lala land, it doesn't end well.

Often when you get into these situations where everything just gets you really pumped up, and then at the undercurrent level you've got this bad documentation which only seems to get worse.

What are the big pressure points do you think in terms of documentation?

Well, I do believe that these provisions which detach from reality are the biggest issue and are a great also big focus for lenders as well.

So I don't know if you've ever heard the phrase supergrower before, probably not in the context of contracts, but also high water marking is another word for it, where basically many of these baskets they're called though they're not obviously electual baskets, but carveouts to do things like incur debt or pay dividends.

They are presented in the greater of a fixed amount and a grower, which is usually based on EBITDA, And in this the case of these supergrowers, the fixed amount actually increases in line with the EBITDA grower when it goes up, but when EBITDAD goes back down again, it has no effect whatsoever on the fixed amount.

So this is another one of those instances where it is detached from reality, and it appears, you know, in a greater frequency of deals, but it's also a focus for lenders.

There are also the uncapped cost savings and synergies.

Management is notoriously optimistic.

They think that everything's going to go up forever, and if they didn't, they wouldn't be management.

So having some contractual guard rails would be useful, and once upon a time you could expect to see caps around twenty five percent of EBITDA on these types of cost savings and synergies add backs.

But what we've seen instead is barrowers pushing the envelope.

Just post teriffs, there was a barrower who came out with a term that would add back the effect of terraces and that did thankfully get removed during the syndication of that deal, but it would have been the first presentation of EBITDAT even the alusteriffs.

And then there also portability has become a big topic of focus.

Private equity firms love portability.

So portability basically means that if the private equity sponsor sells the barwer to another private equity sponsor or another party, that they won't have to either make an offer for a change of control to bondholders or in the case of a loan, there will be no event of default or mandatory prepayment, depending on which you're astction you're in.

There's no effect if certain conditions are met, including that the barwer can comply with a specified leverage ratio.

And obviously where that leverage ratio is set is going to be very important, and in many deals this is an option that is available on day one, so it isn't even as if the barer needs to delever in order to take advantage of that provision.

And other deals we're seeing that those ratios are calculated based on first lean debt, so first lean secure debt, rather than total debt, so that obviously gives the barwer an easier hurdle to pass.

So you know, in the last one, I will point out and this goes back to the famous J Crew or infamous JA Crew.

Actually think the top I'm wearing is from J Crew, which is quite ironic in a way, but you know, J Crew was one of the first to take assets and put them in an unrestricted subsidiary away from the lender group, assets that were once part of its collateral.

And there are provisions in the restricted payments covenant that actually would prevent restricted unrestricted subsidiaries for being used for certain things that restricted subsidiaries can't be used for.

So this is the concept of an indirect restricted payment.

But again, those who have the negotiating power really like using unrestricted subsidiaries, so they want to be able to use them without any restrictions.

So there are provisions that basically say you can use unrestricted subsidiaries to do anything that are the restricted subsidiary can't do.

It's absolutely fine, and that language has also become more prevalent.

But again this makes sense, right because it's the market evolving, and the market is evolving to benefit those who have most negotiating power, and then those who are negotiating are coming up with ways of coming, you know, fighting back, So lemy blockers and co ops and you know, and we all have litigation.

That's another route that the disgruntled you know lender can can take to potentially bite back against the unfairness of a particular situation.

But whether or not that is going to be successful is obviously uncertain, but it is another I guess tool that they can use.

Well.

That leads me onto the question I was going to ask you, which is is there a discrepancy here between large sophisticated investors with lots of resources and the smaller investor obviously in terms of trying to digest new issuance and bonds as if they come to market, but thinking more about actually how incentivized larger investors are to clean this all up and standardize everything.

Don't they stand to benefit to a greater extent from having things a little murky?

Or is that just me being horrifically cynical?

Oh I am ever the optimists, So I myself would say there are certainly hedge funds that benefit from leaving things quite murky, But the vast majority of lenders prefer transparency because that's how they price risk, and there is a heck of a lot of risk embedded in covenant flexibility.

So my personal view is that everyone benefits from transparency.

I actually think the whole market benefits from transparency, and they're study after study after study that agrees with me.

But what I would say about the smaller the minority lender co op agreements have been in some ways kind of great equalizer because nothing is stopping any lender from picking up the phone and ringing round to their fellow lenders to find out what their plans are on a particular deal.

Nothing is stopping any lender from ringing up barwer to make an opportunistic proposal for how they could rejig the capital structure.

And yes, of course they're you know, money, so the more you have to deploy, the easier that it's going to be.

But in terms of bringing people together, bringing lenders together to cooperate maybe under a cooperation agreement or to a lead into something like that, minority lenders can do that just as well as as the bigger the bigger fish, as it were.

On transparency, I mean, there's always someone making money when there isn't any transparency.

You presume it's the hedgephones, the advisors.

The borrow was certainly benefiting.

Oh, it is a really good time to be a lawyer, I will tell you that is for sure.

I mean the advisors are doing very very well, and they're working really hard.

But in terms of you know, we've talked about ALTIS and SVV, but who else is on you know, in terms of this kind of activity that's pushing it, who's on the naughty step?

So I think SELECTA is another one that I would highlight as being as being on the naughty step, as it were, and that one isn't a really interesting example of a borrower that you used co op a co op agreement actually as an defensive maneuver rather than a defensive maneuver that it was used to bring together an ad hoc group that then was able to benefit from positive you know, commercials as compared to the non ad hoc group, and the non ad hoc group had no opportunity to participate, and that is, you know, that leaves it very difficult to challenge as well.

But it's sort of an open question whether there will be litigation and connection with that.

And I would say in general that there are there's a reticence on the borrowers side to take these really aggressive actions because they don't really want to get sued.

You know, most borrowers are not coming together with their lenders to try to come up with a plan that's going to land them in court.

They ideally want to do a deal that is going to pass the sniff test, as it were, and then they will come up with ways of doing an enemy which is not non pro raada but is actually Parada to all of their lenders and take that route so that they they don't end up in court.

But there are some that are really willing to push the envelope.

And in terms of pushing the envelope, as I mentioned earlier, we are seeing a lot of extreme stuff in the US, but not so much in Europe.

And the sense that we get is that Europe is maybe slightly more genteel and well behaved in relative terms.

But is that true?

I mean, surely, you know, markets just move wherever they go, and money follows, and you know, capitalism at work is one of our guests.

Once put, it will take hold in Europe and it will just get worse there.

I think that many expect there to be more liability management exercises in Europe, and the potential limitations on that have more to do with local law restrictions directors duties management being more nervous about falling afoul of those because sometimes can actually have personal liability for the directors themselves in the case of Germany.

But there are some countries where the director's duties protection is not as intense or or strong, and France is one example of that.

So it really does depend on where the borrower is located as to whether that is a proper dissuading factor.

I wouldn't say that, it's sort of.

I know there was a lot of to talk about Europe being more concerned about reputation, and I really think that reputation only gets you so far.

That maybe because Europe is a smaller market, maybe there is more of a focus on can I bring the next deal?

Will I be able to get the next deal done?

But that's a commercial question that yes, reputation feeds into, but it's more of a would lenders work with me again?

And if not, then that will affect my LPs because at the end of the day, I work for them.

I don't work for.

Lenders, right, But as we talked about, you know, there's so much liquidity that you know, people have a pretty short memory for bad things, certainly in this market as long as it lasts.

But in terms of you know, the jurisdiction, as you mentioned, there are lots of different jurisdictions in Europe and it is more complex than the US.

But where do you think we will see more of this kind of activity in Europe?

Do you think which jurisdictions are most prone to it.

I would say you probably are not looking less toward Germany, though there are always going to be exceptions to that, of course, potentially France, Spain, the UK.

I mean, those are some I would just mention off the top of my head.

But it is potentially an issue in any country.

It just requires a very careful jurisdiction by jurisdiction analysis to think through what the implications are or could be.

So you do then expect Europe to actually mimic the US ultimately in terms of the way things have gone here.

I do expect there to be more leens in Europe.

Absolutely, yes, I'm not sure that there will be as much litigation there tends to it tends that there are less litigious folks here in Europe, but that could also change.

And when their assistant wheels in a massive pile of prospectuses and they've got to weighe their way through, are there any kind of red flags that you kind of you know, look at this one for this name or this sector or this you know, these are the ones you've got to focus on, because these are the ones that are most problematic.

Any red flags at all, I don't.

Want to name any names that would be very inappropriate.

Mell sector types of businesses.

I would say more that when you've got very large capital structures and cross border deals, those are the ones that are going to float to the top in terms of flexibility.

They're going to have the most in terms of convergence between the two markets, so the kind of worst of both.

And if you've got multiple capital structures, then you get the worst of the convergence in the terms and highal bonds and leverage loans.

So those are the ones you have to be really focused on.

They also tend to be the ones that end up in syndication being upsized.

So maybe the equity check reduces and we've just seen this recently in the bootsteal and so then that can have an effect on loosening ratios because of the change in the capital structure.

You're upsizing debt and you're downsizing equity and things tend to loosen a bit.

So those are the ones I would say to focus the most on.

You will tend to find the most in terms of flexibility in those types of deals.

Taking into count all of the different dynamics at play.

Can you use AI to do this?

Unfortunately, not yet.

AI.

It is as smart as the people who are using it.

So if you know how to ask the right questions, then you may get better answers.

The temptation is to rely on AI without knowing what you're supposed to ask, or without having enough information to know whether the answer actually makes sense, and because it feels so easy to type in a question and you get an answer, and AI is designed to make you believe that it's true.

It is unequivocal every single time.

And so unless you know and we have our own AI tool that we give to our students, and it has been trained on hundreds of hours of me talking about covenants, because it has been trained on every single word I've ever uttered for Fox Legal Training, and I spent months interrogating this tool and asking it questions and getting answers and correcting it and refining and refining and refining.

So that's a great teaching tool that's great to learn from.

But even that, I say to my students, if it doesn't seem right to you, remember it's still AI.

It's not infallible.

And unless you know more or less what the right answer is in the ballpark could be the fundamentals of the principles involved.

You're not going to know if the answer is true, and AI is always going to make you believe that it's right every single time.

Maybe we get to a world, though, where the AI is writing the covenants, syndicating the deals, buying the deals, and also assessing the covenants.

That's the future a member of We're all on the beach like drinking mergury at.

That point, exactly, that's the plan.

Great stuff.

Sabrina Fox, founder of Fox Leagual Training.

Thank you so much for being on the Credit Edge.

Thank you so much for having me.

It was a really fun conversation, and of.

Course very grateful to Aidan Cheslin from Bloomberg Intelligence.

Cheers, Thanks James.

Great to be here for even more credit market analysis and insight.

Read all of Aiden's great work on the Bloomberg terminal.

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