With interest rates continuing to hover around historic lows,
many borrowers have refinanced their credit facilities or have
taken on new debt in order to finance new acquisitions. At the same
time, the total volume of deals for the middle market
(smaller than $1 billion) has shrunk, which has meant that more
money from commercial banks, finance companies, and collateralized
debt obligation and collateralized loan obligation funds is chasing
fewer deals. And deal terms are becoming more borrower
favorable—a lot more favorable.
The most dramatic example of how borrower-favorable financings
have become is the recent return of covenant-lite loans. In 2007,
pre-Credit Crisis, CLO and CDO funds were injecting tremendous
amount of liquidity into the market for middle market loans. This
permitted borrowers to have maximum leverage to negotiate senior
credit agreements with very limited covenants—often simply
incurrence-based financial covenant tests. The lines between
