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Leveraged Loans: Covenant-Lite Structure Gains Ground in Middle Market

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Leveraged Loans: Covenant-Lite Structure Gains Ground in Middle Market

middle market cov-lite loans

Covenant-lite structures, long common among larger loans that are broadly syndicated to institutional investors, are increasingly finding their way into smaller transactions.

An imbalance between supply and demand leveraged loan paper, stoked by fundraising for higher-yielding middle market credits, is behind the expansion of borrower-friendly features.

So far in 2017, the share of covenant-lite deals with debt totaling less than $250 million has climbed to 27%, from 11% in 2016. The share this year is roughly on par with that in 2015, LCD data shows.

Among covenant-lite deals now in market is a $200 million loan backing lift-truck manufacturer Hyster-Yale Group. Pricing on the loan, which was initially brought to market at L+425–450, at a 99 original-issue discount, was tightened due to investor demand, to L+400, at 99.75.

Covenant-lite loans are credits that feature bond-like incurrence covenants, as opposed to more restrictive maintenance covenants (you can read more about how cov-lite loans work here).