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This report updates the share of the Credit Suisse Leveraged Loan Index with high-profile covenant loopholes associated with particular borrowers鈥擩. Crew, Serta, Chewy and Envision鈥攁s of Sept. 30 based on Covenant Review鈥檚 extensive database, which covers 98% of Index loans. In addition, we provide the latest read of what percentage of Index borrowers can issue new first-lien debt under free-and-clear incremental tranche without triggering an MFN either because (1) the MFN has expired or (2) the document carves out F&C tranche from yield protection.
Looking at performing loans to borrowers rated Triple-C and/or bid at less than 90 cents on the dollar鈥攕ituations for which players will have the most incentive to employ loopholes to shift value either from lenders to equity or from some lenders to others by priming exercises鈥攖he share is in the same zip code, as we detail ahead.
Majority Consent Voting (鈥淪erta Loophole鈥�)
This, along with the phantom guarantee, is the most far-reaching loophole of the five among Index loans. Headline stats:
- All Index Loans: 62.4% overall/63.4% PE-backed allow majority鈥攔ather than unanimous鈥攙oting.
- Loan to borrowers rated CCC by either Moody鈥檚 or S&P: 67.3% overall/66.7% PE-backed.
- Loans currently bid below 90: 61.4% overall/60.1% by PE-backed.
Phantom Guarantee (鈥淧etSmart/Chewy Loophole鈥�)
This provision allows for the automatic release of guarantees of entities that become 鈥渆xcluded subsidiaries鈥� by virtue of being not wholly owned by the restricted group entities:
- All Index Loans: 64.3% overall/67.7% PE-backed allow automatic release of guarantees of excluded subsidiaries.
- Loan to borrowers rated CCC by either Moody鈥檚 or S&P: 67.3% overall/67.3% PE-backed.
- Loans currently bid below 90: 67.1% overall/71.5% PE-backed.
Pass-Through Investment Basket (鈥淛. Crew Trapdoor鈥�)
This provision, which came to light early in the cycle, is the least penetrating across the Index:
- All Index Loans: 7.0% overall/8.5% PE-backed allow borrowers to transfer intellectual property to unrestricted subsidiaries subject to certain caps and limits.
- Loan to borrowers rated CCC by either Moody鈥檚 or S&P: 8.7% overall/9.5% PE-backed.
- Loans currently bid below 90: 7.2% overall/5.7% PE-backed.
Envision Loophole
This provision we define as loans with: (1) no blocker on transferring material IP or other material assets to unrestricted subsidiaries, (2) a high cap on investments in unrestricted subsidiaries, and (3) simple majority consent voting:
- All Index Loans: 21.3% overall/25.3% PE-backed allow borrowers to transfer intellectual property to unrestricted subsidiaries subject to certain caps and limits.
- Loan to borrowers rated CCC by either Moody鈥檚 or S&P: 19.9% overall/21.4% PE-backed.
- Loans currently bid below 90: 18.4% overall/20.9% PE-backed.
No MFN on Free-and-Clear Tranche Protection
The stats here include loans on which MFN sunset is now expired as well as loans that carved out the F&C tranche from MFN protection:
- All Index Loans: 55.4% overall/56.1% PE-backed allow borrowers to transfer intellectual property to unrestricted subsidiaries subject to certain caps and limits.
- Loan to borrowers rated CCC by either Moody鈥檚 or S&P: 46.9% overall/48.2% PE-backed.
- Loans currently bid below 90: 48.3% overall/47.5% PE-backed.
Sponsor View
Among Credit Suisse Leveraged Loan Index loans, 29 private equity firms had no fewer than 10 credits as of Sept. 30. The table below breaks down for these sponsors the proportion of loans with the four loopholes in question:
Steve Miller聽
CEO of Fulcrum Financial Data
