Leveraged Loans Vital Financial Information
An article in the Financial Times has highlighted a growing trend for private equity owners in the $1.2 trillion leveraged loan market to structure “covenant lite” lending to the companies within their portfolios, potentially leaving investors in the dark.
Interest in leveraged loans – higher risk, higher interest loans for companies with poorer credit history – has soared in recent years, as investors seek to improve fixed income returns. However, these increasingly common loans have been accompanied by a steady erosion of investor protections.
Unlike public equity markets, where reporting requirements are strictly mandated, the leveraged loan market is governed by ad hoc agreements and conventions negotiated between lenders and borrowers. It has been increasingly common for terms in loan agreements to extend the amount of time investors must wait for basic financial updates, with the conventional period for financial statements to be delivered jumping from 45 days to 60 and annual reports jumping from 90 days to 150.
This loss of transparency means investors are deprived of essential information, not least access to early warnings about when a company could be in trouble.
There’s also no standardisation in in the way information is handed over – meaning it often isn’t easy to understand. A worrying trend… and perhaps a future use for standardised, digital disclosures?
Read more here (behind a paywall).