Looser lending covenants may cut risk: Bridgepoint

By Jeffrey Goldfarb

LONDON (Reuters) - Looser covenants on the debt packages backing leveraged buyouts may actually reduce the risk of defaults, said William Jackson, managing partner of private equity firm Bridgepoint Capital.

Eager lenders have allowed private equity funds to extract easier terms on the debt they use to fund buyouts, with U.S.-style "covenant-lite" deals being used in recent European financings for VNU World Directories and classified ad group Trader Media.

That has raised eyebrows in the debt markets, which have long been used to strong covenant packages that allow lenders to step in when problems appear in order to protect their interests.

It has raised concerns that the looser standards could let companies get too deep into trouble before warning flags are raised, particularly when leverage levels have reached dizzying heights.

But Jackson argued that absolute leverage levels are largely irrelevant and looser covenants could allow companies to trade through trouble, reducing defaults.

"Covenants themselves are where risk lies, not the actual amount of debt," he told the Reuters Hedge Funds and Private Equity Summit on Thursday. "Fundamentally, leverage is not the cause of problems in businesses."

His view contrasts with that of John Sainsbury, the former CEO and life president of the eponymous supermarket chain, who said on Wednesday that he opposed a 10.1 billion pound takeover by CVC Capital Partners because the large amount of debt involved would weaken the company in the long term.

Jackson argued lending standards were more important. "What has a big impact is covenants. You can have an underleveraged deal that has very tight covenants (where) if there's a slight downturn in trading, it'll start to mean that there's a cashflow problem for the business," he said.  Continued...