The return of covenant-lite does not mean the debtor-friendly terms will trickle down to the middle market, said Joe McGrath, a managing director at Barclays Capital and its head of global leveraged finance.
“We haven’t seen a huge shift toward covenant-lite deals” in mid-market transactions, in part because the smaller loans offer less liquidity for the lenders, McGrath said. “Covenants at those deal sizes are probably more important.”
Randy Schwimmer, a senior managing director and the head of capital markets at Churchill Financial Group LLC, said covenant-lite has never been a feature of mid-market lending, and he said he hoped it never would be. “Traditional middle market lenders are concerned about the covenant-lite trend migrating to smaller deals,” he wrote in an e-mail. “To paraphrase Charlton Heston, you’ll have to pry covenants from their cold, lifeless hands.”
Covenant-lite loans remain the province of bigger deals and more well-known, well-covered companies, McGrath said. “I think investors are comfortable making those bets.”
They certainly have proven to be, as a surge of covenant-lite loans has enlivened the leveraged loan market since the start of 2011. Among them are TPG Capital’s portfolio company Axcan Holdings, which had no trouble in February upsizing a $450 million covenant-lite term loan to $750 million while cutting pricing on the facility to LIB+400 from LIB+475.
Gymboree Corp., taken private last fall by Bain Capital, and Del Monte Foods Co., which is shopping for better deals under a judge’s orders while awaiting a go-private vote on its deal with Kohlberg Kravis Roberts & Co., also closed covenant-lite loans in February.
Creditors are “able to give up on a covenant because they’ve got liquidity,” McGrath said during a panel at the Columbia Business School Private Equity and Venture Capital Conference today in New York. Julie G. Richardson, a managing director at Providence Equity Partners, added, “Covenants give some protection, but the real protection is if this is a good quality company.”
Arguably, part of the willingness of lenders to go lite now is the relatively modest damage they suffered during the financial crisis and the recovery of those loans since then, McGrath said. If lenders had insisted on restructurings during the dark days of 2008 and 2009, as the covenants would have required, “recoveries for the debt-holders would have been less than optimal.”
That doesn’t mean that smaller borrowers could get the same advantageous terms, he cautioned.