Leveraged loan issuance from lower-rated borrowers has been driving activity in Europe lately (link), with covenant-lite deals leading the way.
As of April 20, in fact, there was €8.16 billion of cov-lite loans from issuers rated B- outstanding, according to LCD’s European Leveraged Loan Index (ELLI). That’s up from €6.58 billion at the end of March and from €3.51 billion one year ago.
Cov-lite loans have been in the spotlight of late as their use has skyrocketed, first in the U.S., then in Europe. These credits are structured akin to a high yield bond in that they feature incurrence covenants, as opposed to the more restrictive maintenance covenants.
With an incurrence covenant a debt issuer would have to meet a specific financial test only if it wanted to undertake a particular action (like borrow money to fund a dividend to a private equity sponsor, for instance). Under a maintenance covenant the issuer would need to meet regular, specific financial tests, even if it did not want to undertake that dividend deal.
Cov-lite detractors say these transactions could put investors and lenders in a precarious position, as they might not become aware if a borrower is nearing financial distress until a point where traditional remedies are no longer viable. – Staff reports
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