Covenant-lite Loan Volume Doubles

By Dennis McCarthy – (213) 222-8260 – dennis@mbsecurities.com –

If your company hasn’t already refinanced into a covenant-lite loan, you should consider refinancing now.  

Not all borrowers will qualify for a covenant-lite loan but, if you can obtain one, a covenant-lite loan is typically easier for a borrower. 

A borrower with a covenant-lite loan will likely spend less time managing to loan covenants and certainly less money on obtaining waivers of covenant terms.

Recently,  Standard & Poor’s reported that the volume of covenant-lite loans so far this year (through Aug 8th) is double that of all of last year.

So far in 2013, more than half the leveraged loans to come to market have been covenant-lite vs. roughly 22% of loans to this point in 2012.

In addition, S&P reports that even smaller loan sizes, $200 million and under, are getting covenant-lite treatment.

Covenant-lite does not mean covenant free. 

Covenant-lite generally means that the loan does not have maintenance covenants, such as a minimum ratio of cash flow to interest, known as an interest coverage test. 

If your company has a loan outstanding, it probably has several of these maintenance covenants set as a relatively tight “trip wire” to alert your lender at the first sign that your company’s results are diverging from its projections.

While covenant-lite loans don’t have maintenance covenants, they often have other types such as negative covenants and incurrence tests. For example, a negative covenant might limit the amount of dividends that a company could pay to its equity or an incurrence test might limit the amount of debt a company could take on.

These covenants restrict a company’s actions but leave a company plenty of flexibility.

What’s prompting lenders to offer covenant-lite loans? 

The increase in covenant-lite loans is largely attributable to the large size and dispersed ownership of leveraged loans today.  As loans have gotten larger in size, the ownership has gotten fragmented.  Many leveraged loans now are widely held by a large number of banks and special purpose hedge funds, or collateralized loan funds. 

These large groups of lenders find it difficult to manage a loan with tight maintenance covenants.  The reaction, therefore, is to eliminate maintenance covenants in favor of other types of covenants.

Recent history has shown that companies with covenant-lite loans have performed comparatively well. 

Lenders in covenant-lite loans have recovered slightly more of their loan, in the event of trouble, than lenders in loans with maintenance covenants.  The sample involved, however, is small and the history short and may be biased by the limited historical availability of covenant-lite loans to larger, better credits. 

Despite the positive historical statistics, some credit agencies are sounding the alarm at the increase in covenant-lite loans predicting that lenders will have less control should there be economic trouble ahead.

So, while the credit market is still receptive to covenant-lite loans, this is the time for your company to consider refinancing. 

I’ve provided links to several interesting articles below.

Please contact me to help your company to refinance its debt or to complete any capital market transaction.

http://www.forbes.com/sites/spleverage/2013/08/14/covenant-lite-leveraged-loan-volume-soars-to-new-record/

http://blogs.reuters.com/felix-salmon/2013/05/31/dont-worry-about-cov-lite-loans/

http://www.loomissayles.com/internet/internetdata.nsf/0/0BF67A378755F21085257B5000566A43/$FILE/CovenantLitePaper.pdf

http://www.pehub.com/2013/09/05/covenant-lite-issuance-more-doubles-2013/#!

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High(?) Yield Bonds

Dennis McCarthy – (213) 222-8260 – dennismccarthy@ariesmgmt.com

New high yield bonds are now being issued at interest rates that don’t really qualify as high.

Forbes magazine reports that the 30-day average high yield new issue bond yield fell to 6.11% at the end of January.

If your company has debt outstanding in an amount of $100 million or more, your company should consider issuing high yield bonds at these historically low rates.

Many companies continue to borrow at short-term floating rates because those rates are amazingly low. Most likely, short-term floating rates won’t stay this low for 5 to 10 years, however. 

In contrast, today’s high yield bond rates present an opportunity to lock in low rates for a long period.

Also, short-term floating rate debt typically carries covenants that restrict a company. 

Again, in contrast, high yield bonds typically have very few covenants restricting the issuer. 

Please contact me to discuss raising high yield bonds or any capital market transaction.

Forbes article link: http://www.forbes.com/sites/spleverage/2013/01/22/high-yield-bond-yields-hit-record-low-6-11/

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