Covenant-Lite credits continue to dominate the US leveraged loan market

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Covenant-lite loans, an issuer-friendly feature that offers less protection to lenders and investors than traditionally structured loans, now account for a record 75% of the approximately $ 970 billion US leveraged loans outstanding , according to LCD.

January is the tenth consecutive month for cov-lite’s market share, as these credits remain the norm in a lending segment that has just completed an unprecedented year of issuance. As of 2015, the cov-lite market share was around 60%.

Cov-lite transactions are in some ways structured like high yield bonds. They include occurrence covenants, which means that an issuer only needs to pass financial tests if it wants to take specific action (pay a dividend to its private equity owner, for example). In contrast, fully covenant loans are much more restrictive. They involve sustaining covenants, according to which an issuer must submit to financial tests every quarter, whether or not it wants to take action.

Cov-lite loans are of course not without detractors. Market bears say the massive amount of cov-lite debt currently outstanding will impact collections on leveraged loans when the current credit cycle – now approaching its tenth year – turns around.

Historically, cov-lite loans have defaulted at about the same rate – or a little less often – than traditionally covenants, although at the end of the last credit cycle – coinciding with the 2007-08 financial crisis. – there was a fraction of the outstanding cov-lite loan that exists today.

On the global record for leveraged loan issuance in the United States in 2017: There were $ 502 billion in higher yielding institutional issues last year, as well as $ 146 billion in loans in the US. pro rata (revolving debt and amortizing term loans, typically bought by banks, as opposed to other investors), totaling $ 649 billion, according to LCD. This does not include the roughly $ 500 billion in loans that were revalued last year.

You can read more about how cov-lite loans work in LCD’s Loan Market Primer (it’s free).

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