Has the European Leveraged Loan Market Reached Boiling Point?

As the European leveraged loan market reaches its high point, David Billington considers whether the prevalence of covenant lite terms will present risks or opportunities.

Key takeaways from this month’s market wrap:

• 75% of the leveraged finance market is currently in the form of leveraged loans:
  • Banks were the main holders of leveraged loans during the last default cycle. This time it will be non-bank lenders, who will probably behave differently.
• 81% of the loan market is covenant lite:
  • There will be more flexibility for distressed borrowers to obtain liquidity in a distress situation, which presents both opportunities (for the providers) and risks (for the covenant lite lenders).
  • If no alternative is available, borrowers will need to use their revolving credit facilities (RCFs) to cover liquidity needs, triggering springing covenants. That will create a leverage point for the RCF holders.
• Covenant lite does not equal no covenant:
  • Even cov-lite deals contain a financial covenant, which is triggered by drawing the RCF above a threshold.