Covenant-lite structures had a breakout month in July, with volume reaching €4.7 billion – the highest level in seven years. In contrast, each of the preceding six months hosted €1-3 billion of cov-lite loan issuance, while the monthly average for 2013 was less than €1 billion.
As a result of this increase, 43% of all loans offered to European institutional accounts in July lacked maintenance covenants. The cov-lite share is moving closer to levels seen in the U.S. market, where these facilities have accounted for roughly 60% of institutional loan issuance in each of the last three months, down from 68% in the early part of the year.
July’s activity brings the European year-to-date cov-lite volume to €14.6 billion, eclipsing any full-year reading on record, including the €8.1 billion tracked in 2007. For the year to date, a record-high 39% of institutional loans have no maintenance covenants, up from 21% in 2013, and 7% in 2007.
Covenant-lite arrived in Europe on the back of cross-border issuance, but while cross-border transactions continue to command a large share of the European cov-lite sample, more domestic transactions are joining the club, such as
Taking the trend a step further, three issuers used the borrower-friendly conditions to opportunistically refinance from a covenanted to a cov-lite structure in July – a process seldom seen in Europe since 2007. They followed in the footsteps of Iglo, which launched a cov-lite refinancing in June.
Continental Foods stripped out maintenance covenants as part of a dividend-linked transaction, while Aenova is similarly seeking to remove covenants and pay a dividend. On the cross-border front, Terex is out with a refinancing that shifts its debt onto a cov-lite footing.
In another sign of hot market conditions, the average number of maintenance covenants on newly issued loans continues to decline. Excluding cov-lite deals, the average number of tests on deals launched in the year to July 31 has fallen to a record low of 2.5, from three in 2013, and 3.6-area between 2008 and 2012 (based on deals for which LCD tracked terms and conditions).
Cross-border transactions are partially responsible for driving this trend. Loans syndicated in the U.S. typically have fewer covenants than their European counterparts – 1.7 covenants on average last year, and roughly 2.5 between 2008 and 2012. However, numerous domestic transactions, such as Generale de Sante and Materis Paints/Chryso, included just one or two covenants, according to LCD News – typically leverage and interest coverage tests.
Of the covenanted deals launched so far this year, a record-high 53% included just one or two covenants, up from 39% last year, and just 17% in 2007. Only 40% of deals tracked by LCD offered what was once the standard covenant protection of four or more tests, down from 43% in 2013, and 69% in 2007. – Marina Lukatsky
