Jupiter defends use of cov-lite loan

Jupiter Asset Management, a UK fund manager recently bought out by management and TA Associates, has hit back at criticism of the £425 million “covenant-lite” loan it will use to finance the deal. The controversial structure, which was pioneered in the US but is now crossing over into Europe, removes many of the traditional protections for lenders.

UK fund manager Jupiter Asset Management has defended its use of a £425 million (€625 million; $842 million) “covenant-lite” loan to finance its management buyout, amid continued criticism of banks’ willingness to lend money on ever more favourable terms.

The structure of the eight-year £425 million “cov-lite” loan, which is being lead arranged by HSBC, removes most of the normal protections for lenders against under-performance, making it almost impossible for borrowers to default on loans.

But a Jupiter spokeswoman said the firm had simply taken the best deal on offer. “Given the quality of the credit, the company was focused on raising debt on the best terms available in the market,” she said.

The loan will finance the £740 million buyout agreed in March by the company’s management, led by Edward Bonham Carter, and US private equity firm TA Associates.

A banking source said the issue was heavily over-subscribed, and denied that the structure was particularly risky. “Bonham Carter is a conservative guy. He’d never put the business at risk unnecessarily,” he said.

Cov-lite loans have attracted criticism from some industry observers, who are concerned that the eagerness of banks to lend more money on ever-more favourable terms to fund buyouts could have disastrous consequences. Leading fund manager Anthony Bolton, who is about to leave Fidelity, recently warned that the increase in cov-lite loans made it a question of “when rather than if” there would be a failure in the debt markets. 
Loans of this type have previously been confined to US deals. However, they are starting to become more prevalent in Europe too, featuring in last year’s acquisition of VNU by a private equity consortium and the recent £1.35 billion purchase of Trader Media by Apax Partners. Kohlberg Kravis Roberts is reportedly also seeking a cov-lite loan to help fund its acquisition of Alliance Boots.

In the same sector, US private equity group Hellmann & Friedman recently took out a £522 million cov-lite loan to refinance Gartmore, the asset manager it bought for £550 million in May 2006. The deal reportedly allowed the buyout firm to recoup all of its initial equity investment.