Cov-lite weighs on current restructuring cycle

By Raji Menon

LONDON (Reuters) - The current restructuring cycle will prove harder than in 2001-2002 because covenant-lite arrangements have robbed the market of the usual early warning signals, a senior executive at Blackstone BLLK.OB said.

Simon Davies, vice president at the private equity group, said the difference between the two cycles is that covenants have since loosened, spreads have tightened and greater leverage has been lent over the past few years.

"What you're getting now is very much a case of no covenants or where essentially you could drive a bus through those covenants," Davies said.

"So you're going to get no early warning. Shit hits the fan, the company runs out of money which causes the default and actually the default and the insolvency process are packaged together," he told the Reuters Restructuring Summit on Friday.

Davies said as a result, there is very little time to initiate a restructuring process.

"This is probably going to increase the amount of precedent we set around the use of bankruptcy procedures to effect restructurings in as value-enhancing a way as we can and it is also going to lead to far more bankruptcies generally across the globe and certainly across Europe," he said.

Covenant-lite arrangements emerged in early 2007 as banks flush with liquidity fought aggressively to drop loan conditions for private equity firms.

Although the volume of cov-lite arrangements was relatively small, they are widely seen as the last stage in a gradual easing of conditions during a long bull run.

(Editing by Paul Bolding)