So-called “covenant-lite” loans have long been a presence in the syndicated lending market. Total issuance in 2007, just before the credit markets came to a standstill, was approximately $100 billion.1 But although covenant-lite loans receded, along with general lending, during the Great Recession, contrary to the predictions of many market observers, they have since resurged, with $151 billion in issuance in the United States in the first seven months of 2013,2 after $29 billion was issued in the first seven months of 20123 and $86 billion was issued in all of 2012.4 Covenant-lite loans have represented about 23 percent of total leveraged loan issuance in the United States so far in 2013 and about 37.6 percent of loans held by institutional investor lenders.5
While the growth of this sector has largely followed the increase over the years of leveraged buyouts and the expanding influence of private equity sponsors, as further discussed below, there are other factors contributing to a rise in the frequency of appearance of covenant-lite structures. In addition, while covenant-lite loans have traditionally occupied one particular segment of the loan markets, namely acquisition or leveraged buy-out financing for high-credit quality borrowers, covenant-lite characteristics have begun to surface in loan facilities for middle-market borrowers as well as in traditional working capital facilities.
