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How to approach cov-lite lending in Europe

19/09/2018

Covenant-light, or ‘cov-lite’, lending is now the norm in both the US and Europe, but there are as yet few tests of the difference that may be felt in times of stress. Well-established lenders nevertheless understand that they need to exercise caution when evaluating each loan opportunity to ensure they are getting paid for the risks, including when the cycle turns. 

The evolution of the European leveraged loan market has brought some benefits like the advent of multi-billion corporate issuers and an active secondary market, as well as some unwelcome features including the dilution of structural protections, like maintenance covenants.

Assuming that a loan manager is alive to the robustness of the borrower’s credit profile and the inherent protections of seniority and security – and assuming efforts to push for excessive documentation flexibility can be successfully resisted or declined – there remains a strong rationale to invest in this relatively stable, high income-generating part of fixed income, despite the late-cycle position of developed markets.

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The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested.

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