Tokyo Investors See Europe Through a Documentation Lens

The LMA's first Tokyo conference welcomed over 300 people to hear from European credit managers and Japanese LPs. Documentation was center stage, and in this market it matters at two levels: the loan agreements between borrowers and lenders, and the CLO indentures between issuers and noteholders. Japanese investors are paying attention to both.

Loan documentation and the LME divergence

At the loan level, the US and European markets look similar on the surface but behave differently under stress. Same collateral pools, same sponsor universes, often the same lenders. The divergence shows up in liability management.

One panellist estimated US LME activity at around $45 billion in 2025. European activity was a fraction of that, and panellists said the reasons were structural. They pointed to Europe's multiple bankruptcy jurisdictions rather than one. Director duties were described as stricter, with criminal exposure possible in Germany, France, and the UK. Restructuring tools like schemes of arrangement meant Chapter 11 equivalents were not the only route. European LMEs that had happened were characterized as more consensual. Panellists expected courts to reject transactions designed to abuse minorities.

The effect is that senior secured loan documentation in Europe holds up better when borrowers get into trouble. The covenants mean more because the enforcement environment backs them up.

CLO documentation and what Japanese AAA buyers police

A Japanese CLO investor mediates their exposure to the loan book through the CLO indenture: eligibility criteria, OC and IC tests, WAL tests, reinvestment rules, diversity score requirements, step-up conditions for upgrades. That is the documentation they actually negotiate.

The Japanese investor panel walked through how they evaluate managers. The qualitative lens came first: team stability, investment philosophy, key-person risk, which panellists described as heightened in Europe because platforms often run with a single PM and single-digit analyst teams. The quantitative lens came second: style consistency and whether that style delivers both senior returns and equity distributions.

The third lens was the one I found most interesting. Senior investors expect managers to accept their CLO documentation requirements. For AAA buyers, structural robustness is governed by the indenture, so a manager unwilling to meet docs standards is unlikely to win a long-term relationship. The investor panel described this as relationship-driven and long-term: managers who share their investment philosophy and accept their documentation standards get repeat business.

The 2028 software maturity wall

One panellist commented that around $200 billion of software debt matures in 2028 or earlier across US and European loans, high yield, and private credit - and this is the scenario where both loan-level and CLO-level documentation discipline matter.

CLO manager panellists said amend-and-extend was the base case for performing names. Terminal value is hard to underwrite while AI's impact on software business models is still being priced, and forcing restructurings on businesses that are currently cash-generating would crystallize losses that might not need to be taken. Several framed the renegotiation window as a chance for lenders to take back control of borrower cash flows: sweep the cash the business is generating now, and tighten covenants as the price of the extension. That is where loan-level documentation is critical.

The CLO-level question is what happens to portfolios holding those loans while the renegotiations play out. Triple-C buckets, WAL tests after resets, recovery assumptions on defaulted software names where collateral is thin - all of these are governed by the CLO indenture. Panellists noted European CLO portfolios already carry lower Triple-C concentrations than the market overall because managers have been selling tail risk earlier rather than waiting for restructuring outcomes. That is where CLO-level documentation operates.

Panellists put tech at roughly 8% of the European loan market, around 20% of US BSL, and 30-35% of US private credit. Some European direct lending funds were described as 75% software. The exposure is uneven by manager, so the 2028 conversations will play out differently across platforms - bringing differentiation across both levels of documentation discipline to light.

The LMA's inaugural Tokyo conference looks set to be an annual event, and I am excited to see how these themes develop in 2027.

‍