The supply/demand imbalance that has characterized the leveraged loan market on both sides of the Atlantic for the bulk of 2017 has continued to allow arrangers to structure deals in an increasingly borrower-friendly way — the most glaring of these developments being the absence of maintenance covenants in loan documentation.
By the end of the third quarter, covenant-lite deals comprised 74% of issuance syndicated in Europe in the year to date, roughly the same as in the U.S. This compares with 60% for the full-year 2016, and 57% for the comparable year-over-year period. The percentage of covenant-lite deals has risen consistently since 2012, when such transactions comprised only 9% of full-year issuance.
Though now standard, cov-lite is not without its detractors, as these loans – which feature covenant protections more similar to high-yield bonds than to traditional leveraged loans – allow a borrower more flexibility before a potential default.
“[With cov-lite] there are no more early warning signals,” says a lawyer active in the syndicated loan market. “The first time you can actually do something as a lender is at payment default.” – Staff reports
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