"I can't think of the last time we had a real covenant"
This is from an article in the Boston Globe quoting Scott Sperling and Kevin Landry of TA Associates:
"The reality is the markets are willing to provide extraordinary amounts of debt, almost indiscriminately," says Scott Sperling , copresident of Thomas H. Lee Partners, the big Boston private equity firm. "It's hard to put these companies into default. I can't think of the last time we had a real covenant in one of our deals."
Landry told me about the terms TA Associates secured recently to fund the purchase of a company. In particular, the interest rate was set at 2.25 percent over the floating London Interbank Offered Rate, or LIBOR. But TA Associates doesn't have to make all its payments in cash if the acquired company runs into trouble. It can make something known as a toggle payment, or "payment in kind," essentially borrowing more to make the regularly scheduled loan payment. The only penalty: an interest rate that rises 0.5 percent."
Covenants are a thing of the past. The toggle payment, payment-in-kind and similar default-avoidance provisions, make even failures to pay interest a non-event.
You could argue that what the lenders are doing is pre-agreeing to terms of a default work-out program. They are saying, "we like the horse we rode in on, and are willing to give them time to get back on track when problems arise." It is a show of faith in the ability of the PE sponsors to work out any problems or ride out short term economic issues.
Is it a bad idea for lenders to be handing over traditional lending rights to PE sponsors? Maybe. But is the cost and outcome of bankruptcy any better?
