Now they're frantically scouring the terms to see just what firms can get away with to survive the fallout.
Often used by private equity groups to fund leveraged company buyouts, their prevalence has rocketed.Over the past decade, the leveraged loan market has trebled to about US$1.4 trillion. Whereas only 15per cent of loans in 2010 were deemed covenant-lite, now more than 80per cent lack clauses that might trigger warnings about a company's finances or stop it stripping out assets, according to S&P Global Market Intelligence.
"The use of flexible covenants has not been tested in a stress environment," said Lisa Gundy, senior covenant officer at the ratings agency."What we potentially have is a market-wide test of how react." Rob Mathews, a partner at Baker McKenzie, said the issue for investors in covenant-lite debt was that they might only find out about a company's difficulties when there's an actual default, or a request for an interest payment delay.
According to Reorg, 85per cent of the high-yield bonds sold in Europe in 2019 allowed for so-called cost add-backs, up from about 50per cent in 2016. Theme park operator Merlin Entertainments, which has had to close most of its venues during the health crisis, sold 500 million euros of bonds on Friday that subordinated owners of bonds it issued only in October with terms Moody's has ranked as some of the loosest ever.
Besides tweaking earnings and loading up on debt, some covenant-lite deals also give companies the leeway to strip collateral out of creditors' reach. Some can then use revenues generated by the stripped asset to keep paying dividends, or use it as collateral again to raise more debt.
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