LevFin Insights: Covenant Review: Docs continue to stretch on all fronts; F&C tranches grow again
In February, loan market conditions remained buoyant, with supply again failing to keep pace with demand, clearing yields tightened further and loan prices tracked higher as LFI details here. The real action, however, was in documentation where well-regarded issuers—and, in some cases, not-so-well regarded issuers—were able to use their technical leverage to stretch covenant terms.
Start with free-and-clear incremental tranches. Among loans for which Covenant Review analyzed final documents, the average F&C tranche jumped to 0.84x of pro forma adjusted EBITDA during the three months ended February, from 0.73x during the fourth quarter.
As this implies the share of first-lien loans that printed with a F&C incremental tranche set near, or above one turn of EBITDA rose to 50% over the three-month-to February, compared to 29.4% during the fourth quarter.
In another sign of the times, MFN sunsets are more regularly surviving the syndication process in early 2017. Indeed, LFI reported on no fewer than 10 first-lien term loans that cleared the market in the year-to-February with a sunset—VC GB Holdings, SESAC, Go Daddy, Change Healthcare, Atotech, Group Zayo, Optiv, Team Health, Synchronoss and Neustar—compared to just three during the fourth quarter. Likewise, over the past three months, a record 24.1% of Covenant Review’s sample of final loan documents contained a sunset (excluding repricing exercises that only adjusted spreads, floors and prepayments fee), compared to 9.1% during the fourth quarter.
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