Loan Requirements Loosen Up….Buying Becomes Easier

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Lenders want higher quality deals, which is why they have loosened up their loan requirements. The rules have become more flexible since there is so much competition in the market. Though there is plenty of debt capital available, not enough deals are being completed which has led to the re-emergence of covenant-lite loans. The last time these loans were common was in the pre-recession period, but now lenders are bringing them back. This practiced started in 2013 and 2014 will see even more of these loans.

Considering this year, the first quarter has seen a rise in deal flow. Maybe in the months to come, this can lead to more completed deals.  As for now, deal makers cannot really decide where they should invest their money.

Though the value of deals has risen, there are not enough deals being made. In 2012, around 2450 deals were made in the middle market and in 2013, this number was around 2140.  Since the deal flow was slow, investors were attracted to collateralized loan obligation funds (CLO) and Collateralized debt obligation (CDO).  The demand of these loans increased and outpaced the supply. This along with a reduced number of deals has led to the re-emergence of the covenant-lite loans. These loans offer limited protection to the lenders and are frequently seem in the upper middle market.

An industry expert told the press that the middle market has seen fewer deal transactions despite the fact there are enough finds. Since there is so much money and not enough deals, it has led to a looser structure and lower rates.

In 2007, the total value of covenant-lite loans was nearly $85 billon.  After that these loans decreased and reached their lowest levels in the year 2010. 2013 saw these loans coming back and 2014 will see them even more. 

 Covenant loans may be favorable for the borrowers but they expose the lenders to risk. There are no restrictions on leverage ratios, interest coverage ratios and third party debts.  These loans have changed the entire game plan. For all other loans, lenders have the upper hand, but for covenant-lite loans, the company which wants to borrow has the upper hand. Obviously the loans are attractive for the borrowers and not for the lenders.

Let’s wait and see if these loans can increase the number of transactions in the M&A industry.


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