Some man-bites-dog news in the leveraged loan world.
Technically, the share of covenant-deals underlying the U.S. market has dropped, the first time that’s happened in 18 months. Before alerting the mainstream financial press, however, we’ll note that the cov-lite share of the market dipped a scant 0.2%, from 79% in September to 78.8% in October. To be sure, cov-lite remains the norm in the new-issue market, as deal structure and documentation continue under pressure, amid sustained investor appetite.
Some background. Historically, leveraged loans have featured maintenance covenants, which are relatively restrictive. They would require an issuer to meet regular financial tests regardless of whether the issuer was undertaking some action (issuing a dividend, for instance).
Today, however, a covenant-lite loan is more likely to feature incurrence covenants, which are less restrictive. These generally require an issuer to be in compliance only if takes a particular action (paying a dividend, making an acquisition, issuing more debt).
This scenario has prompted investors to complain that, in theory, cov-light issuers today can come closer to default before lenders and investors have any recourse, or even receive warning of possible default. – Staff reports
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