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US leveraged loan borrowers sign more covenant-relief, amend-and-extend deals

Covenant-relief activity in the U.S. picked up in December 2020 as borrowers looked for ways to avoid trouble spots with their credit agreements. There were 11 covenant-relief transactions in the month, according to LCD, which matches the combined number of those deals for October and November. Moreover, these borrowers in December helped push the total number of covenant-relief transactions in 2020 to 193, topping the 186 in 2009, in the wake of the Great Financial Crisis.

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Of the 193 covenant-relief transactions in 2020, 183 occurred after April 1. To put that number in perspective, there were 117 covenant-relief transactions in all of 2017, 2018 and 2019 combined.

December's covenant relief transactions included deals from Blue Bird Body Company Inc., Hilton Hotels Corp., RLJ Lodging Trust, TripAdvisor Inc., Summit Midstream Partners LP, Vail Resorts Inc., Global Knowledge Training LLC, Power Solutions International Inc., Ashford Hospitality Trust Inc. and Carnival Corp. & PLC.

Breaking down covenant-relief activity by sector, Services & Leasing topped the list in 2020, with 26 borrowers undertaking this activity. There were 18 such transactions in the Gaming & Hotel sector, followed by the Healthcare and Real Estate sectors, with 15 and 14 transactions, respectively.

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Of course, one of the most fundamental differences in the covenant-relief landscape today, compared to the Great Recession, is that most current deals are in the pro rata segment, comprising revolving credits and amortizing term debt taken on by banks and financial institutions. A decade ago it was institutional issuers, whose debt is primarily bought by collateralized loan obligations and retail/mutual funds and exchange-traded funds.

In 2009 the volume of institutional and pro rata covenant-relief activity was roughly $140 billion and $97 billion, respectively. Fast forward to 2020 and institutional deals accounted for just $20 billion of the $161 billion in covenant-relief volume, according to LCD.

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As usual, we will note that because more than three-quarters of the roughly $1.2 trillion in outstanding U.S. leveraged loans are covenant-lite (and pro rata deals are required to have covenants), it stands to reason that most of today's cov-relief activity is for pro rata deals. For the record, in December, the cov-lite share of the S&P/LSTA Leveraged Loan Index was about 83.5%, roughly where that share has been since July. For reference, at the end of 2008, before the peak of covenant amendment activity during the last financial crisis, the cov-lite share was just 15.5%.

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Amend-and-extend activity, meanwhile, picked up in December, with 15 borrowers extending loan packages totaling $8.4 billion, up from the $2.8 billion recorded in November. The borrowers were Kraton Performance Polymers Ltd, Sinclair Broadcast Group Inc., Weld North Education LLC, A.M. Castle, Uniti Group Inc., Gemini HDPE LLC, HEICO Corp., Flexera Software LLC, Cerence Inc., Lakeview Loan Servicing LLC, TripAdvisor Inc., GreenSky Holdings LLC, Ashford Hospitality Trust Inc., KLDiscovery Inc. and Riverbed Technology Inc.

In terms of volume, the pro rata market made up $5.0 billion of December's $8.4 billion of amend-and-extend activity. Overall, the $77.5 billion of total amend-and-extend activity in 2020 fell short of the $107.2 billion in 2019. Market participants expect amend-and-extend activity to remain robust in January 2021 as borrowers roll their calendars over and look ahead to upcoming maturities.

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Delving deeper into extensions, in 2020 borrowers with pro rata loans focused on maturities coming due in 2021, 2022 and 2023, extending $14.2 billion, $15.2 billion and $8.9 billion of debt, respectively. On the institutional side, borrowers mostly focused on loans coming due in 2024 or later, extending $17.4 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 $4 billion between November and December to about $35.5 billion, against the backdrop of roughly $1.2 trillion in outstanding loan paper. The volume of loans coming due in 2020-2022 fell by about $82.5 billion from the end of 2019. The volume of loans coming due in 2023-2025, meanwhile, shrank by about $121.8 billion between the end of 2019 and December 2020, while the par amount outstanding due 2026 or later grew by $190.8 billion.

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