Page 21 - The GSE Report March-April 2018

MONETARY POLICY
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COVENANT-LITE SHARE OF OUTSTANDINGS
U.S. leveraged loans
In February 2018, the share of outstanding leveraged loans that are covenant-lite set another record high, reaching 75.8%, according to LCD and the S&P/LSTA Loan Index. On February 28, U.S. leveraged loans outstanding totaled $984 billion with $745 billion of covenant-lite loan debt held by institutional investors.
Cov-lites feature incurrence covenants, meaning an issuer must meet financial tests only if it wants to take particular actions (pay a dividend to its private equity owner, for instance). In contrast, fully covenanted loans are far more restrictive with maintenance covenants, which require an issuer to meet financial tests each quarter, whether or not it wants to undertake an action.
“Every cycle, the seeds of ruin are sown in the sunshine,” said Peter Aspbury, head of European high yield at J.P. Morgan Asset Management. “Now potentially a bit of complacency has set
in precisely because the prospects for issuers have been fundamentally sound. We see that complacency more than anywhere else right now ... in the way covenants are set.”
“Are we worried?” asked Rachel Golder, co-head of Goldman Sachs high-yield and bank loan team. “Yes, we’re concerned that this credit cycle has seen covenant light migrate from the highest quality companies to all but the most risky.” (LeverageLoan.com, 03/23/18; Pensions & Investments, Sophie Baker, 02/19/18; Financial Times, John Plender, 03/05/18)
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