Goldman Testing Covenant Lite Market
Shopping The Laureate Education Senior Debt

Goldman Sachs and other underwriters are attempting to syndicate $775 million of covenant-lite term loans, Reuter’s Mike Flaherty reported last night. The loans were made to fund the buyout of Laureate Education at a spread of 325 basis points over Libor, and were fully funded by the underwriters at the close of the deal. Now they are testing the strength of the secondary market for the so-called Cov-Lite loans, which have gone out of favor with many investors.

Cov-Lite loans were a product of the recently deceased extravagant credit market. Unlike traditional bank loans, they are stripped of nearly all of the covenant restrictions that lenders typically rely upon to keep track of the financial condition of borrowers.

“Restriction-free loans used to be the rage, and debt investors couldn’t get enough of them during the LBO frenzy. But debt investors got spooked by the subprime mortgage mess, and Cov-lite, as it became known, went the way of the dinosaur (at least for now), right there with its pal Pik-Toggle,” Flaherty writes.

Unlike the financing for the big buyout deals that are still waiting to close, such as KKR’s acquisition of First Data, the Laureate deal has already been funded, leaving the lenders with no way of pressuring the borrowers into accepting more stringent terms. The loans will likely be sold below par, leaving the original lending syndicate with losses. The depth of the discount, however, may be a sign of the market’s appetite—or lack of appetite—for the loans in the pipeline deals that lenders have committed to make but have not yet funded.

In short, many are looking at the Laureate syndication to demonstrate just how screwed the banks may be on the buyouts scheduled to close later this year.

Goldman to be educated on Cov-Lite appetite [Reuters]