Loan covenants on the decline in borrower-friendly market, Fitch says

By Sara Rosenberg

New York, April 7 - Covenant usage is on the decline as the U.S. syndicated loan market has continued to grow dramatically, according to a new study by Fitch Ratings called "Loan Volumes Surge, Covenants Shrink in 2005."

In 2005, the number of covenants incorporated into a typical non-investment-grade loan package fell to six, down from eight in 2002 through 2004, the study found. One such example is the senior debt/cash flow restriction, which only appears in 15% of credit agreements in 2005 as compared to appearing in 24% in 2004 and 29% in 2003.

"Covenants are critical in safeguarding loan terms and ensuring that potentially risky managerial actions are checked," said William May, senior director of Credit Market Research, in the release. "With fewer covenants, there are weaker safeguards on borrower behavior."

"Robust loan market conditions have contributed greatly to the low default environment of the past several years," added Mariarosa Verde, managing director of Credit Market Research, in the release. "That said, the decline in structural protections will very likely set the stage for the next round of credit problems."

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