An abundance of liquidity relative to opportunities has led to investors agreeing to lend to companies at relatively high leverages without the usual conditions that enable them to renegotiate terms when the businesses underperform.
Almost all deals syndicated that are taking place in Europe this month are covenant-lite, which means that investors will be unable to intervene and force borrowers to negotiate with them until the companies miss a debt repayment or run out of money, according to Debtwire, the number one fixed income news provider.
A total of 32 per cent of loan deals in the first half of 2016 in Europe were covenant-lite, compared to 16.7 per cent in the same period in 2015, XtractResearch data shows.
Covenant-lite deals were traditionally a feature of the US market, but European investors are now warming to them.
Despite initial concerns, Brexit did not disrupt the leveraged debt markets. On the contrary, investors are piling into deals with a record amount of issuance expected this quarter. So far, €18.4bn worth of leveraged loans allocated this quarter, compared to just €8.75bn in 3Q15, Debtwire data shows.
On new terms
Out of the 12 leveraged loan deals in the market last week, 11 were covenant-lite, showing European investors’ willingness to accept aggressive terms typically seen Stateside.
Macro uncertainty has caused some temporary wobbles, but the hunger for yield in a low interest rate environment and relative asset scarcity have driven more and more investors towards the higher paying leveraged debt markets, thereby allowing borrowers to extract better financing terms.
The lack of financial covenants is bad news for vulture funds, which typically buy the debt of struggling businesses with a view of to taking them over when the companies default on their loans.
The event of default is the most commonly used trigger for so-called “loan-to-own” investors to wrestle ownership of businesses from previous owners.