As cash-rich institutional investors continue to flock to the leveraged loan asset class, issuer-friendly covenant-lite deals comprise an ever-growing share of loan outstandings, which now tops 35%, according to LCD, an S&P Capital IQ unit.
It’s no wonder cov-lite outstandings are piling up. Year to date, 56% of new -issue leveraged loans have been covenant-lite. That’s up from roughly 20% at this time a year ago and from negligible numbers during the dark days of the 2008-2010.
Cov-lite loans are more appealing to issuers in that include only less-restrictive, bond-like incurrence covenants, which require an issuer to be in compliance with the loan terms only if the issuer takes a specific action (making an acquisition, for instance). Traditional loans (covenant-heavy), on the other hand, have maintenance covenants, which require an issuer to be meet specific financial criteria at regular intervals, whether or not the issuer is undertaking a specific action.