The share of covenant-lite deals in the U.S. leveraged loan market continues to reach new heights. The latest record: As of August, cov-lite accounted for 78.64% of outstanding loans, up from 77.8% in July, according to the S&P/LSTA Loan Index.
This is the 10th straight record. The cov-light share of market has increased steadily from roughly 64% in August 2015.
Cov-lite loans are in some ways structured akin to high yield bonds, in that they feature incurrence covenants, as opposed to the more restrictive maintenance covenants.
With an incurrence covenant a debt issuer would have to meet a specific financial test only if it wanted to undertake a particular action (like borrow money to fund a dividend to a private equity sponsor, for instance). Under a maintenance covenant the issuer would need to meet regular, specific financial tests, even if it did not want to undertake that dividend deal.
Market pros agree that the cov-lite loan structure will hinder recoveries on bank loans, whenever the current credit cycle turns and defaults begin to mount, though the jury is out as to just how much of a hit recoveries will take.
One hint: S&P’s LossStats, and LCD, conducted analysis on recoveries of cov-lite loans that defaulted before the 2008-09 financial crisis, versus those that were structured and defaulted after the crisis. The later-vintage group of cov-lite loans saw an average discounted recovery of 56%, compared to a 78% average recovery on the earlier deals (though the data in the later sample is thin, as there have been few leveraged loan defaults during this cycle). You can read more about this LossStats analysis here. – Staff reports
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