The Blackstone Group’s COO Hamilton “Tony” James wants it to be known that his support of covenant lite and PIK toggle deals is not merely self-serving. He supports relaxed lending terms for the greater good of deal-makers everywhere. “Covenant lite and PIKs are in everyone’s interest,” he said at The Deal’s Private Capital Symposium this week.
The style of financing, popularized during the last few years of highly competitive lending rates, often gets blamed for the current strain in leveraged finance. “Everyone hates covenants, but they work!” is a popular sentiment among lenders, now in the driver’s seat with liquidity dried up.
James argued that LBO shops have a better understanding of how to recap a struggling company than its lenders do. Why involve them in the situation? “It’s false to think that debt holders know how to better capitalize a company versus the private equity firm owning it,” he said.
A company in covenant violation ends up in more dire straights than if it were not placed under such constraints, he argued. That situation leads the business to drift as the debt holders step in to further tighten their grip. Ultimately, “(Covenant lite and PIK toggles) preserve the ability of a company to recover without going into bankruptcy,” he said.
The only party that doesn’t benefit from loose lending terms is the senior secured lenders, James said, countering that that since the tranche is tied to assets, it won’t lose much of its investment in the event of a workout regardless. Subordinated lenders aren’t complaining because they continue to collect interest, he added.