The erosion of maintenance covenants continued in 2017 with the traditional 3-4 maintenance covenants barely on the radar at 1% (vs 5% in 2016) and cov-loose at 47% (down from 58%) leaving the winner as cov-lite dominating at 52% (vs 37% in 2016) of all deals in 2017.
While springing leverage covenants are taking hold, it is clear that the covenant package as a whole is being degraded in a number of ways. Other findings include:
- Q4 saw a dramatic increase in the number of deals which allow equity cures to reduce borrowings below the RCF testing threshold;
- By Q4 there had been a threefold increase in deals where the requirement for consent does not terminate until a payment breach or insolvency EoD has occurred; and
- Historically lenders expected borrowers to deleverage over the life of the loan but the rise of cov lite has seen a fall away in this requirement.
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