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Leveraged Loan Investor Defense ‘Destroyed’ Amid Rampant Demand

July 12, 2021, 4:22 PM

Companies borrowing in the $1.2 trillion leveraged loan market are taking advantage of fierce demand for the floating-rate asset class to weaken critical covenantsthat traditionally protect lenders.

At the start of the year, new leveraged loans for private equity-backed firms didn’t allow immediate payment of unlimited dividends, or an investment binge, without a significant reduction in leverage.

Six months later, 75% of such loans had nothing to stop them funneling cash to shareholders, according to a report by Xtract Research entitled “Leveraged Incurrence Tests are Being Destroyed.”

“More and more we are seeing borrowers being given the ability to ...