Europe Loan Protections Falling Below U.S., Covenant Review Says

Investors in Europe’s leveraged-loan market should “strongly resist” a shift toward protections that are weaker than those in the U.S., according to Covenant Review.

“The covenant trend has fundamentally weakened many traditional protections in a European leveraged loan,” Jane Gray, the research company’s London-based co-head of European research, wrote in an Oct. 13 note. “Investors should strongly resist” this, she said.

Borrowers are increasingly using more-flexible loan terms that give them greater ability to increase debt or sell assets without triggering a default, the note said. The companies have gained an upper hand in loan talks as investors are turning to risky assets to boost yields that have been crushed by European Central Bank bond buying.

“European loan covenants may be weakening beyond that of the U.S. loan market,” Gray wrote.

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