Covenant Lite Loan Valuations May Be Heading South!

By Stan Feldman, Ph.D. Chief Valuation Officer, Axiom Valuation Solutions

Interest rates are at historical lows and lenders, flush with cash, have been lending at a record pace. These loans for the most part are covenant lite which means they do not contain the usual creditor protective covenants. Equity holders like these cov-lite loans because a part of the equity risk is transferred to the creditors. However, if the debtor heads south and the firm faces difficulty paying interest and principle, the picture becomes bleak for both debtors and creditors. This is the case now for firms that are in the hospitality and restaurant sectors. A case in point is TriMark USA, a distributor of restaurant equipment. The company was bought by Centerbridge Partners in 2017 for $1.2 billion using about $795 million in cov-lite bank debt. With cash flow drying up, the firm borrowed $120 million from Oaktree and Ares. In making the loan, the two hedge funds were able to “prime” the existing lenders. This means that the new loan is senior to the cov-lie bank loan. The result is that the values of the existing debt and equity are significantly reduced. Second, if TriMark seeks bankruptcy protection at some point, the likelihood is that the senior creditors will get a significant portion of the business and the value allocated to the bank debt will be significantly reduced. With credit so available and continued weakness in the economy, there will likely be an increase in priming which will result in cov-lite loans losing a great deal of value.