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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—J. Crew, Serta, Chewy and Envision—as of Sept. 30 based on Covenant Review’s 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—situations 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—the share is in the same zip code, as we detail ahead.
Majority Consent Voting (“Serta Loophole”)
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—rather than unanimous—voting.
- Loan to borrowers rated CCC by either Moody’s 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 (“PetSmart/Chewy Loophole”)
This provision allows for the automatic release of guarantees of entities that become “excluded subsidiaries” 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’s 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 (“J. Crew Trapdoor”)
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’s 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’s 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’s 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
CEO of Fulcrum Financial Data
