Elizabeth Fournier, Nicholas Pettifer, Tom Young
Covenant-light (cov-lite) loans were criticised following during financial crisis. But cov-lite elements to deals are being used again in the US, with their popularity set to rise throughout 2010.
Cov-lites’ comeback will be limited, and unlikely to reach markets in Europe and Asia at all. And it's not the fear of a return to excessive risk-taking that's holding them back.
In the fourth quarter of 2009, many private equity houses embarked on total leverage recap dividend programmes with banks on cov-lite terms. These programmes are deemed safe investments by the bank as they essentially see private equity houses re-mortgage old debt.
A private equity house will typically reduce its leverage on successful investments by paying down debt. It then re-leverages to the original level in order to pay its investors a dividend. The outlay for banks is low and,...