Note: This story and chart have been updated to include July-end numbers.
Covenant-lite loans, which offer less protection to institutional investors than do traditionally structured credits, continue to make up more and more of the $943 billion U.S. leveraged loan market. At the end of July, 72.7% of all outstanding loans were cov-lite, according to LCD. That’s the most ever, and is up from roughly 69% at year-end.
Cov-lite loans are credits that have incurrence covenants – similar to a junk bond – rather than more restrictive maintenance covenants (you can read much more about this in LCD’s Loan Primer). For obvious reasons, they are more attractive to issuers, and have gained steady acceptance from loan arrangers and investors, particularly since 2012, when the U.S leveraged loan market found a higher gear after the financial crisis of 2007-08.
While the popularity of cov-lite loans has prompted worries in some corners of the market, historically, these deals have not defaulted any more frequently than loans with traditional covenants. Then again, as naysayers are fond of pointing out, they’ve never comprised this much of the market before, so they will be under scrutiny once the current credit cycle turns. – Staff reports
This story first appeared on www.lcdcomps.com, an offering of S&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.