Loan Covenant Quality Hits Record Low in North America in 2017

Investor protections in North America reached a record low on Moody’s Investors Service’s Loan Covenant Quality Indicator (LCQI), hitting 4.15 in the third quarter of 2017, a deterioration of .06 from the prior quarter.

The LCQI is updated on a quarterly basis and ranges from 1 (strongest investor protections) to 5 (weakest). The indicator reviews investor protection in the covenant packages of speculative-grade leveraged loans, which Moody’s analysts said will remain covenant-lite in the foreseeable future, despite the lack of financial maintenance covenants.

“Borrowers are making the most of a wide-open market,” said Moody’s Vice President Derek Gluckman. “As demand continues to outpace supply and pressure on covenant quality remains intense, it is hard to see what investors get in return for giving up covenants in these frothy market conditions.”

When repricing protections lapse, Moody’s reported borrowers are then refinancing at six-month intervals. The LCQI’s five-year historical average was recorded at 3.71 and reached its best in the third and fourth quarters of 2012 at 3.18.

—Andrew Michaels, editorial associate

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