With the market’s first 7NC1 for a fixed rate deal seen in the US market a few weeks ago and the continuing theme of covenant erosion over the last 12 months, we’ve put together a 2020 Covenant Watchlist.

This includes recent trends across HY covenants in Europe plus key areas we see as vulnerable to further ‘innovation’ either on economic or legal terms. These have the potential to be future battlegrounds between bookrunning banks, aggressive sponsors and investors. 

In the context of last week’s sharp sell off it is unlikely for now… but we start with a dangerous question. Will incurrence covenants disappear completely from High Yield?

The Sponsor’s Holy Grail – The Death of Covenants 

We flagged Jaguar Land Rover’s deal last year which was the first Single B in Europe to be done on a High Yield Lite basis – i.e. without RP, Indebtedness or Asset Sales covenants. This phenomenon has become very common in the Double BB space in Europe. It isn’t much of a stretch to see a world where HY Lite deals become more frequent in the Single B market. As is typically the case for covenant deterioration, first for a good credit or in unique circumstances (JLR used to be Double BB) then as a broader precedent. 

In 2019 we also saw deals which removed one or more of the most significant covenants without going fully HY Lite. This Covenant Pick N’ Mix is another trend to watch out for. 

One other area we see as vulnerable to innovation is the standard Investment Grade Covenant Suspension provision in nearly every High Yield deal. If lots of Double BB deals are being marketed as “HY Lite”, then isn’t it possible that you could see a deal with Covenant Suspension upon the Issuer receiving a Double BB rating or meeting a leverage threshold?

In the meantime, away from a dystopian future without covenants, we’ve included our observations for each covenant area below. We’d love to hear your thoughts on other trends we may have missed or other future battlegrounds. As ever – we’re available at team@9fin.com or via our site chat bubble. 

Call Protection

Economics / Interest Rates

Debt Incurrence / Liens

Restricted Payments / Permitted Investments

Asset Sales

Others