It’s not surprising so much fuss has been made about the proliferation of cov-lite structures in the leveraged loan market. After all, what was the exception even among larger issuers has become the rule (see our Chart of the Week).
Indeed this trend has been growing since 2013 when almost 60% of loan volume lacked maintenance covenants. That share grew to 68% in 2014, 74% in 2015, and 75% last year. Compare that to the height of the leveraged loan boom in 2007 when only a paltry 25% of issuance was cov-lite.
Our “Case for Covenants” series led one reader last week to ask us: “To what degree have covenants been weakened since 2008? And is there an expectation of default percentages, impact on pricing and expected recoveries?”
As we noted earlier in this special series, pre-crisis cov-lite was the province of only the best, most liquid, corporate credits. Investors felt comfortable that risks of payment defaults were low and expected recoveries were high. According to S&P, cov-lite loans historically possessed the highest recoveries among loan asset classes.
But that was before loan arrangers began to bestow cov-lite on this most recent crop of middle market issuers.