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Eyeing relief, US leveraged loan issuers continue to amend covenants

Amid the economic fallout brought about by the coronavirus pandemic, creating covenant headroom continues as a top priority for U.S. leveraged loan issuers.

There were 30 covenant relief transactions in June, according to LCD. That is down from 46 in May. For perspective, these transactions over the second quarter totaled 104, just a baker's dozen short of all such deals in 2017, 2018 and 2019 combined.

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For a broader reference, year-to-date there have been 114 covenant-relief transactions, just six shy of the total for the first six months of 2009 in the wake of the global financial crisis. And there have been more than twice as many this year as there were in the first half of 2015, when a slew of energy issuers undertook covenant-relief deals to secure financial headroom.

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Breaking down covenant relief activity by sector, services and leasing tops the list, with 16 borrowers over the last three months. Coming in second and third are gaming/hotel and healthcare, with 12 and nine transactions over the last three months, respectively.

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There is a fundamental difference in the covenant-relief landscape today, compared to the global financial crisis. The majority of current deals are in the pro rata segment, while a decade ago it was institutional issuers seeking relief. Pro rata loans comprise revolving credits and amortizing term debt and are syndicated mostly to banks and other similar financial institutions. Institutional debt comprises longer-dated term loans, with relatively little amortization. This debt is bought largely by collateralized debt obligations and, in the U.S., retail investors, such as loan mutual funds and exchange-traded funds.

In January through June 2009, the volume of institutional and pro rata covenant relief activity was roughly $81 billion and $66 billion, respectively. Fast-forward to 2020 and institutional deals account for only $8.1 billion of the $99.3 billion in covenant relief volume so far this year, according to LCD.

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The lopsided scenario of today is because more than three-quarters of currently outstanding U.S. leveraged loans are covenant-lite, so ostensibly there are fewer limitations that issuers might have to maneuver around. So it stands to reason that most of today's covenant relief activity is for pro rata deals. For the record, in June, the covenant-lite share of the S&P/LSTA Leveraged Loan Index was 82%, nearly unchanged since the beginning of the year. For reference, at the end of 2008, before the peak of the covenant amendment activity during the last financial crisis, the covenant-lite share was just 15%.

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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. However, that activity seems to be easing, with just three borrowers last month upsizing revolvers by a total of $215 million. That is down from the six borrowers that added some $886 million in May, and the nine borrowers that added $1.2 billion in April, according to LCD.

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Turning to loan extensions, amend-to-extend activity in June picked up by $4.5 billion, from $1.4 billion in May, across transactions for Univision Communications Inc., Internet Brands Inc., BJ'sBJ's Restaurants Inc., CSM Bakery Solutions LLC, Forterra PLC and M/I Homes. Notably, many of these transactions — $2.7 billion of the $4.5 billion — were institutional extensions. Year-to-date, A-to-E activity has been on par with 2019's levels, with borrowers extending facilities totaling some $42.7 billion.

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Delving deeper into extensions, borrowers with pro rata loans focused on maturities coming due in the next three years, extending $9.2 billion due in 2021, $7.9 billion due in 2022 and $6.2 billion due in 2023. On the institutional side, borrowers last month mostly focused on loans coming due in 2024 or later, extending $12 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 $10.7 billion between May and June, to about $73.8 billion, against the backdrop of $1.15 trillion in outstanding loan paper.

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Compared to the end of 2019, the volume of loans coming due in 2020-2022 has fallen by about $44.2 billion. The volume of loans coming due in 2023-2025, meanwhile, shrank by about $78.6 billion between the end of 2019 through June, while the amount of par outstanding due 2026 or later grew by $82.8 billion.

This analysis was written by Richard Kellerhals, who covers the pro rata debt market for LCD.

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LCD comps is 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.