The 2017 Covenant Forum

January 31, 2017 | 10 On The Park, New York

The protection afforded investors in both high-yield bonds and leveraged loans has deteriorated in recent years. This deterioration has accelerated over the last 18 months as the quality of the covenants in bond indentures and credit agreements has become increasingly inversely related to the level of investor demand. With too much money chasing too few investments with attractive yields, borrowers and issuers hold the upper hand, and they have been using it to increase their flexibility by loosening covenants and pressing favorable interpretations of ambiguous or poorly-drafted language.

Please join the Xtract team at a forum in New York this January where panelists will discuss the state of covenants in the current loan market and review provisions in bond indentures which, whether through design or error, provide issuers with greater flexibility than expected, including significantly increasing their secured debt capacity.

    • 08:30

      Registration and Breakfast

    • 09:15

      Opening Remarks

    • 09:30

      The Tension in the Leveraged Finance Market: Flexibility versus Transparency

      Leveraged loan and high-yield bond issuance has dropped off significantly in the last few years. The decline has coincided with both a low-rate and a low-default environment. With fewer opportunities to put their money to work and emboldened by the absence of any significant losses in the market, investors have been more willing to accept the arguments of borrowers and issuers that they need flexibility to properly and efficiently run their businesses.

      This flexibility has taken several forms: in most instances, it has freed borrowers from the yoke of maintenance financial covenants; and for both borrowers and issuers, it has allowed them to engineer their financial ratios to an unprecedented degree, thereby diluting the strength of their incurrence tests.

      Despite the continuation of a generally low-default environment, the energy sector has of course seen a spike in such activity. For issuers in the energy space, flexibility has meant allowing them to seize on unlikely interpretations of provisions that confer greater latitude in action than expected, sometimes with deleterious effects on investors.

      Some investors have voiced a degree of comfort with the increased flexibility; most have expressed frustration with it and have agitated for at least an increased degree of transparency in return, so that they can at least monitor the newly-permitted activity.

      Against this backdrop, attendees will hear panelists debate and discuss how negative covenants have evolved over the last few years to provide for flexibility and whether that evolution has gone too far. They will also discuss whether the investors’ desire for transparency is being met.

      Among the questions to be discussed: 

      • Is the increased flexibility resulting in unexpected dilution of lenders’ interest in collateral?
      • Is it also resulting in permitted leakage of value from the credit group?
      • Should borrowers be able to take any action after a default (as opposed to an EoD)?
      • What lessons can be learned from the Intelsat case and its finding of unexpected secured debt capacity?
      Andrew  Brady
      Andrew Brady
      Managing Director and Leveraged Loan Portfolio Manager, Marathon Asset Management
      Kyungwon (Won) Lee
      Kyungwon (Won) Lee
      Partner, Shearman & Sterling LLP
      Richard F. NeJame
      Richard F. NeJame
      Managing Director – Head of Restructuring & Special Situations Advisory, Oppenheimer & Co. Inc
      Michael  Schlembach
      Michael Schlembach
      Executive Director, J.P. Morgan Asset Management
      Justin  Smith
      Justin Smith
      Managing Director, Xtract Research LLC
    • 10:30

      Conclusion of Forum