Covenant-lite outstandings grow as investor market clamors for loan assets

covenant-lite loan outstandings

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.

You can read more about cov-lite deals here, at LPC’s free online Loan Market Primer.


US Foods sets $2.1B covenant-lite leveraged loan

US Foods is launching today a $2.1 billion covenant-lite term loan. Citigroup has scheduled a lender call for US Foods for 11:00 a.m. EDT today for both new and prospective lenders, sources noted.

The term loan due March 31, 2019 will carry six months of 101 soft call protection. Price talk and use of proceeds will be outlined on the call.

The issuer last tapped the loan market in December 2012 with a $450 million fungible add-on to its covenant-lite extended term loan due March 2017, which is priced at L+425, with a 1.5% LIBOR floor, and is covered by a 101 soft call premium that lapses next month.

In June 2012, lenders holding about $1.24 billion of the issuer’s roughly $1.94 billion covenant-lite term loan extended their paper to March 31, 2017. The term loan dates to the 2007 LBO of the foodservice distributor, then known as U.S. Foodservice, by Clayton Dubilier & Rice and Kohlberg Kravis Roberts & Co. Corporate ratings are B/B3. The secured debt is rated B-/B3, with a 5 recovery rating. – Staff reports


Cov-relief, A-to-E activity remain slow in hot April loan market












Amendment activity was lackluster again in April. With liquidity running hot in the institutional market, amend-to-extend activity was limited to pro rata loans. Covenant-relief activity, meanwhile, remained slow. In all, four issuers loosened tests on $2.8 billion of leveraged loans, versus $5.8 billion in March.

This chart is part of an LCD News analysis available to subscribers. Other charts in that analysis:

  • Amend-to-extend volume
  • 2014 maturity wall

– Steve Miller


Issuer’s market: Covenant-lite loan volume nears all-time record

covenant-lite loan volume

Covenant-lite loan volume in the U.S. so far in 2013 has topped levels seen during all of 2012, and is fast approaching the full-year record set in the pre-Lehman market of 2007, according to S&P Capital IQ/LCD.

Year-to-date cov-lite loan volume stands at $93.5 billion, as issuers and private equity firms rush to take advantage of an accommodating institutional investor market that is sitting atop a seemingly ever-growing mountain of cash.

The full-year covenant-lite loan total for 2012 was $86.7 billion. The record annual volume is $96.6 billion, in 2007.

About that investor cash. Net inflows into loan mutual funds and ETFs have totaled nearly $16 billion so far this year, riding a 44-week streak of inflows, according to Lipper FMI. CLOs have played a major role here, as issuance in that market has boomed so far in 2013 after being left for dead after the 2008-09 financial markets collapse.

While cov-lite activity is eye-popping – these deals comprise more than half of all first-lien leveraged loans completed so far this year – it should be noted that the bulk of loan market activity in 2013 has been straightforward repricings/refinancings, as opposed to more high profile M&A/LBO deals.

Covenant-lite loans are those that have bond-like incurrence covenants, as opposed to more-restrictive maintenance covenants. Historically, as the leveraged loan market heats up and technicals shift in favor of issuers, cov-lite issuance grows. – Tim Cross


Hostess term loan backing Apollo buyout gains on entry into trading mart

hostess logoAccounts yesterday received allocations of the $500 million covenant-lite term loan for Hostess Brands, which has advanced to a 100.5 bid after breaking for trading at 100/100.5, from issuance at 99, sources said. The seven-year loan is priced at L+550, with a 1.25% LIBOR floor. The loan is non-callable in the first two years, followed by 102, 101 call premiums in years three and four, respectively.

At 99, the loan yields about 7.12% to maturity. The yield tightens to 6.88% at the midpoint of the opening market.

Hostess, which is in the process of liquidating its assets and brands, is selling its snack-cakes business to Apollo Global Management and Metropoulos & Co. Apollo and Metropoulos’ $410 million bid for the unit was the stalking-horse bid, though according to a notice filed yesterday by Hostess with the bankruptcy court in White Plains, N.Y., the Apollo and Metropoulos bid was the “only qualified bid that was received by the debtors,” and that as a result, no auction would be held.

Prior to allocating the deal, Credit Suisse and UBS this morning added a ticking fee to the deal. It is set at zero basis points for the first 30 days, but would step up half of the drawn spread, or 275 bps, thereafter. A hearing to approve the sale is scheduled for March 19, and sources note the ticking fee was added to the deal in the instance there is an appeals process.

As reported, the arrangers last week cut pricing on the term loan, which was originally talked at L+600-625, with a 1.25% LIBOR floor and a 98.5 offer price. In addition, the loan was upsized by $50 million. The incremental debt is earmarked for general corporate purposes, which sources note could include a potential higher bid for Hostess Snacks, a reduction to the equity contribution, or a potential bid for snack-food business Drake’s.

The financing also includes a $60 million asset-based revolver. – Kerry Kantin/Chris Donnelly



Twinkies, Ho-Ho’s New Home: Apollo, Metropoulos team for Hostess cakes biz, launching Wednesday

Credit Suisse and UBS are arranging financing backing the purchase of the Hostess Brands cakes business by Apollo and Dean Metropoulos, sources said.

A bank meeting is set for Wednesday as the issuer comes to market with a $450 million, seven-year covenant-lite term loan and a $60 million asset-based revolver.

Price talk and ratings have yet to emerge.

Commitments will be due on Friday, March 8.

The Hostess reorganization will see the bread business sold to Flowers Foods as Apollo and Metropoulos take the snack brands. Although purchase prices haven’t been announced, Hostess suggested in a bankruptcy court filing earlier this month that proceeds could top $1 billion. – Chris Donnelly


More market resistance: Dematic drops plan to reprice covenant-lite leveraged loan

Dematic has withdrawn a proposed repricing of its covenant-lite term loan, sources said.

Credit Suisse had been shopping the deal at talk of L+325 with a 1-1.25% LIBOR floor and a par offer price, according to sources. The repriced loan would have included a 101, one-year soft call premium.

The B/B2 issuer’s $540 million covenant-lite term loan was placed in December. Proceeds backed AEA Investors and Teachers Private Capital’s acquisition of the global provider of warehouse technology and materials-handling solutions.

The seven-year term loan due December 2019 cleared the market at L+400, with a 1.25% LIBOR floor, and was issued at 99. Lenders would have been paid out at 101 had the repricing gone through, sources noted.

Credit Suisse, J.P. Morgan, and Barclays arranged the senior secured financing, which also included a $75 million revolver.

Also in support of the LBO, the company placed a $265 million issue of 7.75% notes due 2020, which priced at par via J.P. Morgan, Credit Suisse, and Barclays. The deal leveraged the company at 3.5x through the term loan and about 5.5x on a total basis, sources said at the time. – Chris Donnelly/Kerry Kantin


Kinetic Concepts seeks to strip covenants from buyout loans

Kinetic Concepts has approached its lenders for an amendment to strip maintenance covenants from its term loans, according to sources.

The loan is currently governed by two maintenance covenants: total leverage and interest coverage, which are set at 8.25x and 1.15x in the current quarter, respectively. Under the terms of the amendment, the revolver would be governed by a springing-leverage test, sources note.

As well as stripping covenants, the company is looking to make other changes to the credit agreement, including reducing the excess-cash-flow sweep to 25%, from 50%, and revising certain baskets, sources said.

Bank of America Merrill Lynch is running the amendment, for which consents are due Friday, sources said. Lenders are offered a 15 bps consent fee.

The company is not seeking to change pricing on its loans. The medical-device company last tapped the loan market in November for a cross-border refinancing of its 2011-vintage LBO loans. A $1.1618 billion C-1 term loan due May 2018 is priced at L+425, with a 1.25% LIBOR floor; a $323 million C-2 term loan due November 2016 is priced at L+375, with a 1.25% floor; and a €248 million C-1 term loan due May 2018 is priced at E+450, 1.25% floor. All term loan tranches are covered by 101 soft call protection that rolls off in November.

Kinetic Concepts, which was acquired by an Apax Partners-led consortium in 2011, is rated B/B2, while the loans drew BB-/Ba2 ratings. – Staff reports


TransDigm sets cov-lite refinancing for launch tomorrow

With its 101 soft call premium set to roll off imminently, TransDigm is launching a refinancing and repricing via Credit Suisse. A lender call is set for tomorrow at 10:00 a.m. EST.

The issuer is talking its $2.2 billion covenant-lite term loan at L+275 with a 75 bps LIBOR floor, offered at par. The seven-year term loan comes alongside a $310 million, five-year revolver. The term loan comes with a 101, one-year soft call premium.

TransDigm is rated B+/B1, and its loan is rated BB-/Ba2.

Commitments will be due on Wednesday, Feb. 13.

Pricing on the current term loan is L+300, with a 1% LIBOR floor.

TransDigm is a supplier of engineered aircraft components for commercial and military aircraft. The company trades on the New York Stock Exchange under the ticker symbol TDG with an approximate market capitalization of $7.65 billion. – Chris Donnelly


Amendment activity limited in January amid strong liquidity

Amendment activity was muted in January and, in a sign of the times, largely favored issuers. For one thing, amend-to-extend activity was largely absent from the institutional space as issuers took advantage of super-strong liquidity to ink more advantageous transactions. For another, covenant-relief was limited to just two executions that are both packaged with a spread cut:

• Summit Materials will ease certain covenants, according to sources. As well, Summit is offering at a 99.75 OID a repricing to L+400/1.25% floor from L+475/1.25%.

• INC Research will loosen the leverage test by half a turn and shave pricing to L+450-475 with a 1.25% floor, from L+575/1.25%.

This chart is part of an LCD News analysis available to subscribers. Other charts in that analysis:

  • Monthly amend-to-extend volume
  • Loans due by year-end 2015 without LIBOR floors

– Steve Miller