This comes after a record year for covenant-lite issuance in the US. According to Bloomberg, $168.8 billion of cov-lite loans were issued in the US between April and mid-November this year, compared with $100.8 billion for the whole of 2012. Roughly 55% of all new leveraged loans in the US are now cov-lite. There has been a demonstrable change in covenant quality, says Gary Herbert, portfolio manager at Philadelphia-based Brandywine Global. The ability for corporates to issue covenant-lite loans is very strong. Investors are seeking out corporate exposure rather than rates or credit-sensitive govvies, and we are seeing deals oversubscribed by two to three times.
Some in the market argue, however, that five years of financial crisis have made investors far more sophisticated about the risks they face in this part of the capital market. We are about one ebitda turn below the levels that we saw in 2007, says Raman Bet-Mansour, partner at Debevoise in London. The mentality is, however, rather different. In 2006 we were getting to the end of a long boom period, not knowing that we were headed towards the crisis, whereas today we are still at the early stages of recovery. Whether or not investors are prepared to take risk, they are aware that it is there they are going into investments with their eyes open.