The use of so-called “cov-lite” deals is snowballing in Europe and the US, in spite of warnings from regulators and financiers that these instruments could produce new dangers for investors if the credit cycle turns, FT reports.
In recent weeks London bankers have sold a flurry of financing packages for European companies that feature reduced use of covenants — stipulations, such as minimum levels of interest coverage, to protect lenders.
Those raising finance have included investment group Gartmore, fund manager Jupiter, catering group Gate Gourmet and chemicals group Cognis.
The private equity owners of Dutch retailer Maxeda and European telecoms group Debitel are expected to raise such deals soon, while KKR, the buy-out firm, may use cov-lite loans to fund its acquisition of pharmacy group Alliance-Boots.
In the US, more than a third of all loan issuance this year has been cov-lite, according to Standard and Poor’s Leveraged Commentary Data, an industry newsletter. “Talk is that arrangers [investment banks] are being told not to bother calling [private equity] sponsors for new mandates unless they are prepared to do cov-lite,” says S&P LCD.