The first quarter of 2021 was a frenzy of activity in the loan market. Continued lender appetite and a tidal wave of refinancings resulted in continued covenant erosion. Lenders did have some success in pushing for anti-Serta provisions and Chewy blockers, but overall covenants took a beating.
Q1 2021 hedge fund letters, conferences and more
In a new report, Xtract Research highlights some of the more borrower-friendly terms that have cleared the market enough times to legitimately (and unfortunately) be called market, as well as those that just are starting to take wing.
Key points from the report include:
- The average covenant score for large sponsored loans plummeted to 2.87.
- The most aggressive sponsor by covenant score in 1Q21 was Ares Management, with an average covenant score of 1.4.
Sponsor Loan Market
The Day One Capacity for all borrower action for which we record capacity increased.
The percentage of loans which allowed the borrower to incur additional first lien debt in excess of 200% of its closing date EBITDA almost doubled.
Loans which gave the borrower the unlimited capacity to invest in non-guarantor subsidiaries continued its upward trajectory to 73% which is particularly troubling when coupled with the increased capacity for structurally senior debt.
The incidence of trap doors (the investment provision which allows non-guarantor restricted subsidiaries to invest in unrestricted subsidiaries with the proceeds of any investment made in them) ticked up which of course laid the ground for an increase in the incidence of ‘black holes’ (the fatal combination of a trap door with the unlimited capacity to invest in non-guarantor restricted subsidiaries), reversing a hopeful trend seen in prior quarters.
Middle Market
As with the Sponsor market which it tends to mimic in all the wrong ways, the Middle Market also saw an increase in Day One capacity.
The percentage of loans which allowed the borrower to incur additional first lien debt in excess of 200% of its closing date EBITDA increased.
Loans which gave the borrower the unlimited capacity to invest in non-guarantor subsidiaries held steady at about 2/3 of all loans, the effect of which is amplified by the jump in increased capacity for structurally senior debt.
