Investors call for greater covenant transparency

A survey has found almost unanimous agreement among investors in the European leveraged finance market that covenant capacity cannot be accurately calculated.

More than 90 percent of investors in Europe’s leveraged finance market have said they are either unable to accurately calculate covenant capacity or cannot determine whether their calculations are accurate because management’s calculations are not disclosed.

The findings come from a survey by the European Leveraged Finance Association, a trade body representing more than 30 institutional fixed income managers including investment advisors, insurance companies and pension funds.

The survey of 140 investors found that discussions with management teams about covenant capacity often do not occur. Around 40 percent said management never or almost never, answer investor questions on covenant capacity and almost a further 50 percent said management only sometimes answer those questions.

Worryingly, covenant calculations form part of many investors’ environmental, social and governance analysis. More than 70 percent of respondents said they considered transparency about covenant calculations to be one aspect of their overall ESG analysis of a company, and over 75 percent said disclosure on covenant capacity would strengthen a company’s governance score under their firm’s ESG analysis.

ELFA is currently pulling together best advice recommendations following conversations between trade associations, law firms, banks and leveraged finance investors.

These discussions have focused on areas such as definition of EBITDA under the covenants, the amount of outstanding debt captured by the ‘indebtedness’ definition, restricted payments capacity (including back-dated build-up basket capacity) and the flexibility for a borrower to disapply IFRS 16 to calculations under its covenants.