Cov-lite situation in PE
What exactly is the concern with cov-lite loans? It's not like PE houses are risky borrowers.
That one graph showing that cov-lites now make up 70% of all outstanding leveraged loans in the US gets spread around a lot, but what is the problem there?
“Its not like PE houses are risky borrowers” - so can you explain why Loans of their Portfolio Companies are not Investment Grade rated?
Yeah this a pretty asinine question no offense, you’re oftentimes dealing with highly levered non investment grade debt with companies that have not established themselves / businesses without an asset base / no collateral. You’re purely lending off cash flows which are highly susceptible to volatility if the company is not managed right or it’s in a cyclical industry. Big difference between LMM, MM, and large cap companies
"It's not like PE houses are risky borrowers." Are they guaranteeing the loans? lol
For any individual lender, cov lite only truly makes sense as part of a strategic move / funding platform together with several other reputable lenders, whereby:
1) you benefit from more sets of eyes during the DD process, i.e. if there's any nasty hair on the deal, it will hopefully be noticed and trimmed away in the structure, docs and security package (to the extent that the docs are tight on additional permitted pari passu debt, otherwise you're going to have to make room for at least another lender in the ICA, right?)
2) you get to share a potential bad taste event with a few other lenders, so if the sponsor is at least somewhat well known, word will travel, and their next funding will be tighter or more expensive (hopefully, right?)
3) you absolutely must be in the deal for strategic / reputational reasons, and need to telegraph to other lenders that you can play ball (even though you're going to be on the other end of a secondary sell down, but everyone starts somewhere, right?)
4) you do cov lite paper as part of a club instead of a syndicate (unlikely nowadays), so chances are that you see familiar faces in the funder group, and you are more likely to reach consensus than if you were in a big syndicate holding smaller allocations individually
Does #2 really happen? Seems like plenty of firms, even smaller ones, get away with aggressively beating down their creditors all the time and have no trouble sourcing credit. There are so many platforms now in the space, it seems incredibly commoditized.
Absolutely, yes you’re right. It rarely happens precisely because there’s way too much yield being chased across the cap table. There are still areas where cov lite isn’t and won’t be a thing for a long time (thank God for rate hikes) i.e. infra and energy/renewables. The base rate IRRs in those asset classes are much smaller than in traditional buyout PE to incline sponsors to readily accept a few hundred bps in exchange for a no frills “all inclusive” cov lite facility.
The debt funds are just lending other peoples money so they don’t give a fuck. Tha banks are are cucks.
This is a concerning question.
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