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Covenant relief for leveraged loans slows in November, but records set in 2020

Capital Markets View – February 2021

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LCD Monthly: Demand for US loans puts borrowers in the driver's seat

Capital Markets View – January 2021

2021 Leveraged Loan Survey: Defaults edge higher; credit quality a concern


Covenant relief for leveraged loans slows in November, but records set in 2020

The pace of covenant-relief activity in the U.S. leveraged loan market continued to slow in November, with the number of such transactions falling to five, from six in October, nine in September, and from the record of 46 set back in May, according to LCD. Despite the slowdown, there have still been a whopping 182 covenant-relief transactions through the first 11 months of 2020, topping the record from 2009 during the Great Recession.

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Of the 182 covenant-relief transactions in 2020 through November, 172 occurred after April 1. To put that number in perspective, there were 117 covenant-relief transactions in all of 2017, 2018 and 2019 combined.

Breaking down covenant-relief activity by sector, Services & Leasing tops the list, with 26 borrowers undertaking this activity from January through November. Coming in second is the Gaming & Hotel sector, with 18 transactions. Next come the Healthcare and Real Estate sectors, with 15 and 14 transactions, respectively.

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Of course, one of the most fundamental differences in the covenant-relief landscape today compared to the Great Recession is that most current deals are in the pro rata segment, comprising revolving credits and amortizing term debt taken on by banks and financial institutions. A decade ago, it was institutional issuers, whose debt is primarily bought by collateralized loan obligations and retail players.

In January through November 2009, the volume of institutional and pro rata covenant-relief activity was roughly $132 billion and $93 billion, respectively. Fast forward to 2020 and institutional deals account for only about $15 billion of the nearly $150 billion in covenant-relief volume through November, according to LCD.

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As usual, we will note that because more than three-quarters of the roughly $1.2 trillion in outstanding U.S. leveraged loans are covenant-lite (and pro rata deals are required to have covenants), it stands to reason that most of today's cov-relief activity is for pro rata deals. For the record, in November, the cov-lite share of the S&P/LSTA Leveraged Loan Index was about 83%, roughly where that share has been since July. For reference, at the end of 2008, before the peak of covenant amendment activity during the last financial crisis, the cov-lite share was just 15%.

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Amend-to-extend activity, meanwhile, also slowed in November, with eight borrowers extending loan packages totaling $2.8 billion, down from the $8.8 billion recorded in October and $6.9 billion in September. The borrowers were Strategic Education Inc., Daseke Inc., Apogee Enterprises Inc., Allison Transmission Holdings Inc., Peabody Energy Corp., Acadia Healthcare Co. Inc., Interface Security Systems LLC and Packers Sanitation Services Inc.

In terms of volume, A-to-E activity was entirely taken up by the pro rata market, with these transactions representing all of the $2.8 billion of November's total. Year-to-date A-to-E activity still falls short of the total recorded in the same period in 2019, with 2020 volume at about $69 billion through November, compared to about $102 billion over the same period a year ago. Market participants expect A-to-E activity to remain subdued in December, but are expecting a big jump in January if the relatively upbeat sentiment continues in the equities market.

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Delving deeper into extensions, this year borrowers with pro rata loans have focused on maturities coming due in 2021, 2022 and 2023, extending $14.2 billion, $11.9 billion and $8.6 billion of debt, respectively. On the institutional side, borrowers have mostly focused on loans coming due in 2024 or later, extending $15.5 billion of that debt.

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Turning to upcoming debt maturities, the volume of loans coming due in 2020-2022 fell by roughly $6.2 billion between October and November to about $39.5 billion, against the backdrop of roughly $1.2 trillion in outstanding loan paper. Compared to the end of 2019, the volume of loans coming due in 2020-2022 has fallen by about $78.4 billion. The volume of loans coming due in 2023-2025, meanwhile, shrank by about $105 billion between the end of 2019 and November 2020, while the par amount outstanding due 2026 or later grew by $156 billion.

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