Cov-lite keeps growing

Author: Lizzie Meager | Published: 29 Jun 2017

Loans without financial maintenance covenants, known as cov-lite, continue growing in popularity in Europe, fuelled by investor appetite for returns. This is pushing them towards riskier speculative-grade loans in their droves and allowing borrowers to dictate the terms almost entirely.

Investor protection is eroding
In the first quarter of 2017, 67% of all term loan B (TLB) leveraged finance deals were cov-lite, up from 48% in the same period in 2016 and 27% the year before, according to Moody’s.

Richard Etheridge, associate managing director at Moody’s said the competition between TLB leveraged deals and high yield (HY) bonds has enabled the convergence in terms, as they now attract the same investors. “The credit funds that invest in leveraged loans are generally used to cov-lite from their experience investing in HY,” he explained.

This erosion of investor protection will be standard throughout 2017, though smaller, less popular transactions generally considered...