Cov-Lite’s comeback

April 11, 2011, 1:00 PM UTC

One sign of a recovery: Banks are bringing back bubble-era terms for corporate loans.

Forget the market’s recovery: If you want proof that the Street is baaack, check out “covenant-lite” loans. The chart above tells it all. A fave of private equity shops in the boom years, cov-lites let companies pile on debt in a takeover without giving lenders the same protections as common loans, whose “covenants” are tripped if things go wrong. After three years in a deep freeze, cov-lites now make up about 27% of all 2011 institutional loans, or $30 billion, according to S&P’s Leveraged Commentary & Data — on pace to match 2007’s record $100 billion.

Where’s money been flowing? The bulk is going to retail and service companies. Gymboree, Del Monte Foods Co., and J. Crew Group are all using cov-lite loans for buyouts. Petco is refinancing a cov-lite loan, as is Leslie’s Poolmart. While there’s been grumbling about the return of the bubble-era financing, companies can’t be blamed. Neither can lenders. With interest rates hovering around zero, investors are hungry for any extra yield they can find. And bankers are hungry for making deals. Demand has been bountiful. Hope springs eternal.

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