| NEW YORK, Sept 20
NEW YORK, Sept 20 Huge demand for leveraged
loans from billions of dollars flowing into U.S. loan funds
pushed covenant-lite loan volume to a record $188.7 billion, far
surpassing the record of 2007, and still going strong.
Unrelenting investor demand for higher-yielding assets and
floating-rate exposure has enabled issuers to sell these loan
products that allow for future acquisitions or aggressive credit
policies, but offer less protection for investors.
Investors have poured money into floating-rate loans,
fearing a rise in interest rates, and private equity firms have
taken advantage of the demand to get looser debt structures.
Covenant-lite issuance so far this year is 74 percent higher
than all of 2007 before the collapse of Lehman Brothers, and
more than five times the $35 billion issued in the first nine
months of 2012.
Multibillion dollar loans for computer maker Dell
and hotels operator Hilton were launched this month
as covenant-lite deals.
New covenant-lite loans of more than $2 billion each for
video game publisher Activision and surgical product
manufacturer Biomet were priced in September, with
pricing cut in syndication due to high investor demand.
Oil and gas outfit Fieldwood Energy is now in the market
with a $2.63 billion covenant-lite first- and second-lien
Covenant-lite loans used to be reserved for stronger
companies and credits, but are now so common in the U.S.
leveraged loan market that investors are becoming wary of some
credits with a full covenant package.
"Transactions with covenants these days can suggest other
problems with the credit, maybe that it is new to the market, or
exiting from bankruptcy," said Christina Padgett, senior vice
president at Moody's Investors Service.
Covenant-lite has mainly been used by private equity firms,
but non-sponsored issuers seeing the robust investor demand have
begun seeking these financings.
In today's hot financing market, the volume of non-sponsored
covenant-lite loans has risen to nearly $50 billion
year-to-date, with credits such as casino games maker Bally
Technology and video game company Scientific Games
opting for large covenant-lite loans to finance
This is more than double nearly $20.4 billion of
corporate covenant-lite loan volume in 2012, and more than
triple the $16 billion in 2011.
Middle market loans for smaller, riskier companies, which
are usually more likely to contain covenants, have seen
increased covenant-lite issuance since the end of 2011. Middle
market covenant-lite lending hit $2.73 billion in the second
quarter of this year, the highest level since 2007.
As lending to lower-rated companies has increased generally,
more of them are also opting for covenant-lite financings.
That trend is evident particularly in the B3 ratings
category. Around 18 percent of covenant-lite loans are for B3
rated companies so far this year, versus 8 percent in 2012 and
3.7 percent in 2011.
Sources said that strong retail investor demand is driving
covenant-lite lending. Lipper reported $1.33 billion in fund
inflows for the week ending September 18, continuing a trend
that has been ongoing since the start of the year, with $50.7
billion of money hitting the asset class in 2013 so far.
Loan portfolio managers said that new institutional clients
are also seeking to invest. More than $57 billion of CLOs have
been issued this year, topping 2012 volume.
"There's a tremendous amount of demand and only so much
supply. When there's more demand than supply, you can certainly
do things like get covenant-lite packages through," said one
"A few years ago, you always had three or four covenants.
It's one, maybe two these days," said Jessica Reiss, the lead
loan covenant attorney at Moody's.
Despite the rise in covenant-lite lending, arranging banks
and investors are reluctant to say that covenant-lite is the new
"I don't know yet that I'd call it standard. It's headed in
that direction, but I don't know that we're quite there yet,"
said the portfolio manager, noting that covenants remain a key
negotiating point in loan syndications.
During June's market disruption, covenants were added to
several deals that were originally launched as covenant-lite
loans. Oil and gas firm WildHorse Resources added a covenant to
a $325 million second-lien term loan, and medical cost
management services provider MedSolutions also included a
leverage covenant on a $300 million term loan B.
CLO funds have restrictions on covenant-lite lending that
have not eased in response to new developments, which could put
pressure on covenant-lite issuance, or even curb it, if CLOs
exceed their limits and are no longer able to buy the paper.