Terms of Endearment

Despite continued strong deal flow this month, conditions in the leveraged loan market remain constructive for issuers. Yes, there’s been push-back on specific transactions, as we’ve been highlighting. But cash keeps flowing into retail funds and new CLOs keep ramping. That’s providing more fuel to the broadly syndicated financings fire.

The middle market is also in good shape coming into the last days of July. Direct lenders have raised plenty of dry powder in the form of credit funds, separate managed accounts, and middle market CLOs. Matching that demand has been a steady, if unspectacular, stream of new and refi business.

Of course, competition to lead financings remains keen, despite some market pushback on edgier transactions. Indeed, as hold levels expand, crowding out smaller lenders, the inventiveness of sell-side arrangers remains noteworthy.

Such is the case of “covenant-fade.” Unlike cov-lite, which is in the capital structure day one, cov-fade loans start out life with a covenant, then disappear when ebitda reaches a certain level. It’s not clear whether the covenant reappears if ebitda later falls below that level, but we suspect it’s a one-way street.