The end of cov-lite loans?


Earlier this year, there was lots of talk about the rift between hedge funds that buy loans backing buyouts and private equity companies. For all that talk, the sponsors were successful in issuing bonds that carried fewer restrictions.  Covenant-lite loans became popular. According to Standard & Poor's, covenant-lite loans--in which lenders give up most of the traditional controls that banks can wield over their borrower's performance--accounted for one-third of all new leveraged loan structures this year, about four times as many as last year. So the rush to finance all those buyouts may come back to haunt the institutions that agreed to less protection. About 80 percent of the covenant-lite issues are rated in the B category, about one-third of such issues are likely to default. Yet another reason for credit holders to worry. Some hedge funds may be glad they were blackballed.  

For more:
- here's a Dow Jones article