Recovery chances lower for covenant-lite loans-S&P
NEW YORK, July 18 (Reuters) - The popularity of "covenant-lite" loans that made up almost a third of new leveraged loan structures this year may result in lower recoveries when borrowers default, Standard & Poor's said in a report on Wednesday.
Recovery estimates for covenant-lite loans, which lack traditional financial covenants that allow lenders to require minimum levels of leverage and interest rate coverage, are typically 8 percent to 14 percent lower than for equivalent borrowers with full maintenance covenants, according to S&P.
More-traditional maintenance covenants allow banks to step in at any point if a borrower's performance drops below a certain benchmark.
With covenant-lite loans, a bank can only act if a borrower attempts to take specific actions, such as adding more debt or making an acquisition.
"This means by the time a default occurs, there may not be much business enterprise value left to recover," S&P analyst Ana Lai said in the report.
As the volume of leveraged loans reached record highs, covenant-lite volume reached $97 billion through June, compared with about $24 billion for all of 2006, S&P said.
Recent large covenant-lite loans include Freeport-McMoRan Copper & Gold's $7.5 billion term loan, Univision Communications Inc.'s $7.45 billion term loan and Aramark Corp.'s $5 billion credit facility.
