Over the past several years in the US, commentators have noted the resurgence of covenant lite deals, including increasingly in the middle market and direct lending space. When (as?) the credit cycle turns, naysayers worry that these structures may impact lender recoveries, as borrowers lack incentive to start restructuring discussions with their lenders until it may be too late.
Here Stuart Brinkworth, the European head of leveraged finance at Mayer Brown, discusses similar developments in the UK market, where sponsors are picking and choosing from the high yield bond and syndicated loan markets and also borrowing from US-style documentation. Among other things, Stuart discusses the evolution of “cov-less” transactions, where loan agreements include fewer covenants that, along with generous addbacks result in the “cumulative effect” of “covenants with little teeth.”