Moody's: Covenant-lite loans on the rise in U.S. power project loans

By Cristal Cody

Tupelo, Miss., May 8 - Dilution of project finance features is growing for high-yield investors in U.S. power projects, Moody's Investors Service said on Wednesday in a report.

"As investors and lenders emphasize yield over risk, they appear willing to accept loosened covenants that are more akin in their flexibility to covenant-lite corporate loans than traditional power project loans," Charles Berckmann, a Moody's analyst and co-lead author of the report, said in a statement.

"The tradeoff for this extra yield has been a loosening of project finance features that protect lenders, especially lenders in the term loan B market."

Changes lenders are accepting include weak or no financial covenants, broader asset sales and incremental debt provisions, with the changes ultimately to the benefit of project sponsors, the majority of whom are private equity sponsors, according to the report, "US Power Projects: Project Finance Rides the Covenant-lite Wave."

"PE sponsors are likely, and have demonstrated a willingness, to exploit the additional flexibility inherent in weaker structures, which could potentially increase the loss given default on project finance loans," Berckmann said.

In addition, debt upsizing prior to the close is on the upswing, according to the report.

"Several issuers have gone to market with a pre-determined debt sizing only to upsize prior to close," the report said. "In most cases, the upsize was reflective of a lower interest spread and strong investor appetite for high-yield paper. Aggressive sponsors, which are mostly private equity firms, are the ultimate benefactors of the upsizing as increased leverage ultimately results in increased upfront payouts, a negative for creditors."

Although credit quality is moderately weakened, the trend has not yet had broad rating implications, Moody's said.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.