Hello everyone, Europe has been seeing the emergence of covenant lite/covenant none financing since 2011/2012, maybe even longer and I was wondering what this will mean for the distressed investor. Since many of distressed for control plays are based on companies that are inherently healthy companies that default on covenants due to cyclical reasons or other reasons, will this mean that we will see less defaults of healthy companies due to covenant breach and more defaults due to failure to service interest/debt? If yes, what does this mean for different types of distressed investors? For example the rescue financing type, the loan to own/control type and the one that purchases the bonds and is along for the ride?
Thanks!
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I would say your premise is fundamentally wrong. You don’t see a lot of companies go BK because they miss an EBITDA covenant. They go bankrupt because they can’t afford to pay their interest or principal.
Cov-lite probably leads to more, not less, distress in the end. The point of covenants is to keep borrowers prudent and for lenders to have the ability to intervene before things get really bad.
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