Amid the growing economic damage caused by the COVID-19 pandemic, U.S. leveraged loan issuers are urgently inking deals with lenders to modify, waive, or suspend loan covenants. In fact, the total number of covenant-relief deals in April hit 27, according to LCD, besting the previous monthly record of 25 in 2009, in the wake of the Great Financial crisis.
Looking back to that earlier era, 2009 had a record number of covenant-relief deals, with 74 borrowers amending credits between January and April, totaling $48.5 billion.
Returning to 2020, the April covenant-relief activity brings the year-to-date count and volume on par with the YTD 2015 numbers—when a slew of energy issuers undertook these deals in search of covenant headroom—and the count, at 36, is the second-highest YTD level ever.
And April might just be the start of things, on the covenant front. On average, April’s covenant amendments provided the borrower relief for 1.3 years, or roughly five quarters.
Breaking down covenant relief activity by sector, Healthcare took the top spot, with five borrowers—CONMED Corp., Acadia Healthcare, Surgery Partners, Encompass Home Health, and CryoLife—all inking deals since the crisis escalated in March. Healthcare makes up the second-largest sector of U.S. leveraged loan outstandings, so its relative activity here isn't necessarily surprising. Gaming and Hotels is next on the list, with four borrowers relieving covenants, while Manufacturing and Machinery companies had three.
Of course, the covenant-relief landscape today looks different than it did during the global financial crisis. The majority of these deals are in the pro rata segment these days, versus the institutional segment a decade ago. By April 2009 the volume of institutional and pro rata covenant-relief activity was almost even, at $11.8 billion and at $10.1 billion, respectively. Fast forward to April 2020 and institutional deals accounted for only $1 billion of the $21.8 billion covenant-relief volume.
This is, of course, because more than three-quarters of the outstanding U.S. leveraged loan market is covenant-lite (and because pro rata deals are required to have covenants). For the record, in April, the cov-lite share of the S&P/LSTA Leveraged Loan Index was 82.1%, which was unchanged from March. For reference, at the end of 2008, before the peak of the covenant amendment activity during the last financial crisis, the cov-lite share was just 15.5%.
Along with amending covenants, since the COVID-19 pandemic escalated, U.S. loan issuers have urgently approached lenders to shore up liquidity by boosting the size of their facilities. Nine borrowers last month upsized their revolvers by a total of roughly $1.2 billion. That is down from the 12 borrowers that added some $2.3 million in March, but up significantly compared to the previous months.
Turning to extensions, A-to-E activity was down slightly in April, to $5 billion, from $5.5 billion in March. And as in March, all of April’s total belonged to the pro rata market, as the institutional segment, aside from a handful of outlier transactions, remained closed after social distancing measures and widespread closings took root. There has been a significant uptick in A-to-E activity in general this year, with borrowers extending facilities totaling some $33.8 billion, compared to about $19 billion over the same period last year.
Delving deeper into extensions, borrowers with pro rata loans focused on maturities coming due in the next three years, extending $7.2 billion due in 2021, $6 billion due in 2022, and $5.4 billion due in 2023. On the institutional side, borrowers last month mostly focused on loans coming due in 2024 or later, extending $10 billion of that debt.
Stepping back for a broader look at the maturity wall, the volume of loans coming due in 2020–2022 fell by roughly $5.4 billion between March and April, to $93 billion, against the backdrop of $1.18 trillion in outstanding loan paper. Compared to the end of 2019, the volume of loans coming due in 2020–2022 has fallen by about $25 billion. The volume of loans coming due between 2023 and 2025, meanwhile, shrank by about $64.7 billion between the end of 2019 and April 2020, while the par amount outstanding due 2026 or later grew by $74.2 billion.
More info: The accompanying xls includes data points underlying charts in this story, along with:
- Historical covenant-relief stats/pipeline
- Historical A-to-E stats/pipeline
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