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Has cov-lite leveraged loan issuance finally peaked?

After peaking at nearly 80% in 2018's fourth quarter, the share of the U.S. leveraged loan market that is covenant-lite has plateaued over the past few months. Cov-lite outstandings reached a record 79.2% of the market in December, and have since inched lower, to 78.3% at the end of April, according to LCD.

Cov-Lite Share of Outstandings, US Leveraged Loans

Cov-lite loans are less restrictive to debt issuers and the private equity shops that sponsor them, while offering lenders and institutional investors thinner protection than do traditionally covenanted deals. Their popularity has grown over the past few years amid increased investor interest in the leveraged loan asset class, courtesy collateralized loan obligations and loan mutual funds.

The leveling-off of cov-lite outstandings coincided with a pronounced investor flight from the loan segment that began toward year end, amid broader financial market gyrations and as the prospect of interest rate hikes – which had fueled the loan asset class for the better part of two years – became increasingly dim.

Prices on U.S. leveraged loan debt have largely rebounded in 2019, though retail investors continue to pull cash from the segment, opting instead for fixed-rated assets such as high yield bonds. 

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