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Yet Another Record for US Covenant-Lite Loan Issuance

The share of outstanding leveraged loans that are covenant-lite crept to another record high in February, reaching 75.8%, according to LCD and the S&P/LSTA Loan Index.

At the end of February the amount of U.S. leveraged loans outstanding was $984 billion, meaning there is now $745 billion of covenant-lite loan debt held by institutional investors.

The share of outstanding cov-lite loans matches the rate that newly-issued loans are cov-lite, according to LCD. Of the nearly $92 billion of U.S. leveraged term debt issued so far this year, $69 billion is cov-lite, according to LCD.

Cov-lite deals in some ways are structured akin to high yield bonds. They feature incurrence covenants, meaning an issuer must meet financial tests only if it wants to take particular actions (pay a dividend to its private equity owner, for instance). Fully covenanted loans, on the other hand, are far more restrictive. They entail maintenance covenants, where an issuer must meet financial tests each quarter, whether or not it wants to undertake an action.

Historically, cov-lite loans have defaulted at about the same rate – or slightly less often – than traditionally covenanted loans, though at the end of the last credit cycle – coinciding with the financial crisis of 2007-08 – there was a fraction of the cov-lite loan amount outstandings that there is today.

You can read more about how cov-lite loans work in LCD’s Loan Market Primer (it’s free).

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6 Comments

  1. While offering a cov-lite loan is a great way to win a deal, in a broad cycle downturn the lender has little recourse to bring a distressed borrower back to the negotiating table.

    What you’ll see is fully drawn revolvers and lenders taking bigger losses than they otherwise would if maintenance covenants were in place. In this rising rate environment, be wary of any borrower who didn’t bite the bullet and swap for fixed rates.

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