For the first time, more covenant lite than traditional loans are outstanding.
The share of loans in the S&P/LSTA Leveraged Loan Index without maintenance covenants surpassed 50 percent at the end of January for the first time, up from 46 percent at the end of 2013, according to S&P LCD. Some 53 percent of new issue institutional loans were covenant lite in January, down from 68 percent in December.
Meanwhile, borrowers have been refinancing or amending existing loans to reduce covenants, increasing the percentage of covenant lite deals in the market.
Fitch recently issued a report warning that recovery rates could be far lower in the next downturn than in the past due to minimal covenants on outstanding loans, although the different resolution regimes in different countries will lead to different outcomes. For example, the US emphasis on debtor-in-possession differs from the European tradition of creditor-in-possession, with the latter having a higher probability of significant lender recovery than the former.
Europe also has fewer covenant lite loans and more subordinated high-yield bonds than the US, meaning the fallout from a significant downturn will be less severe for lenders in Europe than in the US, according to Fitch.