Covenant-lite loans have returned with gusto this year.
Covenant-lite loan volume has nearly doubled in 2013 at about $163.6 billion in the year to date, according to Standard & Poor’s Leveraged Commentary & Data. This is up from $86.8 billion for all of 2012, said S&P LC&D. In August, there were $14 billion of covenant-lite loan issues, according to Thomson Reuters Loan Pricing Corp.
Typically, covenant-lite loans featured in larger transactions, or those valued at $400 million or more, according to banking and PE sources But they’re now popping up in smaller deals, or those valued at $200 million or less, said the sources.
“It used to be with covenant lite only the highest grade issuers could get it,” said one banker..
One example of such a deal is Casugel, the hard capsule maker owned by KKR, which is launching a $100 million covenant-lite loan to fund its acquisition of Bend Research, said S&P.
S&P estimates that 52% of the institutional loan market comprises covenant-lite loans. This is up from 29% in 2012, said Rob Polenberg, a vice president at S&P LC&D.
“There is no additional cost to covenant lite and it’s relatively inexpensive,” Polenberg said. “Companies don’t like to be hampered by covenants if they don’t have to be. If an issuer can get covenant lite, they want it.”
The easy debt environment has pushed up prices in auctions, according to Rob Morris, an Olympus Partners managing partner. The sales processes for a number of solid companies have required minimum bids of 9.5x to 10x EBITDA to get to the second round, Morris wrote on his blog.
“Feral buyers are very willing to pay, and are paying, double-digit multiples to purchase companies,” he said.
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