This week we chat with Jessica Reiss, the head of leveraged loan research at Covenant Review. Also joining the conversation is Kerry Kantin, a managing director covering leveraged loans at sister company LevFin Insights. Begun in 2006, Covenant Review is the world’s first boutique research firm focused on bond and loan covenants. LevFin Insights provides news and analysis covering the debt capital markets including leveraged loans, high yield, secondary trading, CLOs, middle market and BDCs.

The Lead Left:  Jessica and Kerry, thanks for joining us. It was almost exactly two years ago that we did our first Covenant Review spotlight. The focus on covenants – or lack thereof – has only intensified. Being two years further along in the business cycle probably is a factor. What kind of trends are you seeing?

 Jessica Reiss:  Thank you for the time, Randy. Yes, we’re seeing all sorts of indicators. For example, the typical 365-day period to allow sale proceeds to be reinvested into the business is sometimes being stretched to 24 months. It feels like the base reinvestment period in that case is eighteen months, with a six-month extension if there’s a commitment to reinvest. That’s prevalent for well-regarded firms.

Also, we’re seeing a first-lien leverage calculation based on debt security by a first-lien on collateral assets, which is not new but has become more common. Now, though a few deals have included language that says that to count towards the calculation, the debt may not be subordinated in terms of security or in right of payment. This begs the question of whether debt that is first lien secured but last out in right of payment would be picked up by a first lien leverage calculation. It’s become my soapbox issue.

TLL: Are attorneys trying to thread the needle on this?