With investors continuing to clamor for higher-yielding assets, issuance of riskier ‘covenant-lite’ credits in the U.S. leveraged loan market inched to another record high 2017’s third quarter, according to LCD.
Covenant-lite loans place fewer restrictions on a borrower, making them especially popular with issuers, and prominent when there is pronounced institutional investor demand.
They are structured more like a high-yield (or ‘junk’) bond, as they have financial incurrence covenants – these require lender approval only if the borrower wants to take an action, like adding more debt – as opposed to more restrictive maintenance covenants – where a borrower has to meet quarterly financial tests.
As of Sept. 30, 72.9% of the all U.S. leveraged loans outstanding feature a covenant-lite structure, up slightly from the previous month, according to the S&P Leveraged Loan Index. With total loan outstandings now at $947 billion (the most ever), that means there is some $690 billion of outstanding leveraged loan paper that is covenant-lite.
While the outstanding numbers are impressive, the new-issue levels of covenant-lite loans are even more eye-catching. So far in October, for instance, 82% of leveraged loans issued in the U.S. have been covenant-lite, nearly matching the full-month record of 84%, in August.
For reference, there outstanding share of cov-lite loans once year ago was 66%. Three years ago it was 58%. – Tim Cross
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