The Case for Covenants (Part One)

It’s a fact of life in leveraged lending that terms are market-driven. During periods of excess liquidity – when loan demand exceeds supply – structures become issuer-friendly. When investors pull back, for any reason, terms swing in favor of lenders.

When concerns about China and commodities roiled markets in August 2015, the Dow dropped 2000 points in two weeks. But by the spring of 2016 things began to normalize. The market then entered its current issuer-friendly cycle, with structures continuing to erode. Absent another correction, we see no end to this trend.

A good barometer for sell-side exuberance is prevalence of covenant-lite structures in the middle market. As our Chart of the Week shows, the share of cov-lite has shrunk and swelled over time. Today cov-lite loans less than $250 million are 27% of total volume, less than the 40% for loans above $250 million (and less than $350 million)...

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QUOTE OF THE WEEK

“If data stays solid to improving, this cycle still has legs to it.”
Matthew Peron, head of global equity, Northern Trust.

Chart of the Week: Lite-ing Up

The share of cov-lite middle market leveraged loans is growing relative to larger loans; May’s number is over 60%.

Lead Left Spotlight

David Brackett

Managing Partner and Co-CEO

Antares Capital

"Private BDCs appear to be the better route these days but we’re still early in the process of analyzing the opportunity."

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Ted Bililies

Managing Director & Chief Talent Officer

AlixPartners

"Twenty-first century leadership is all about being able to motivate, inspire, and develop talent. That’s how the best firms succeed."

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Mitch Drucker

Managing Director

Garrison Investment Group

"We believe that to succeed in this market, a team needs to be diversified, cycle-tested and at the right place in the capital structure."

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Stephen Boyko

Partner

Proskauer

"The increase in leverage is likely driven by high purchase price multiples and relatively stable equity contributions by private equity sponsors."

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Kevin Griffin

CEO and Chief Investment Officer

MGG Investment Group

"Entrepreneurs focus on different things and different structures than private equity owners."

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Stephen Nesbitt

Chief Executive Officer

Cliffwater

"Direct lending returns are 10%, versus what could be zero for IG bonds."

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Review of Current Market Conditions/ Analysis of Capital Markets Metrics Including Covenants, Pricing, and Leverage/ Review of Credit Quality/ Outlook for First Quarter 2017

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Review of Current Market Conditions/ Analysis of Capital Markets Metrics Including Covenants, Pricing, and Leverage/ Review of Credit Quality/ Outlook for First Quarter 2017

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