"Covenants are What Give Us Grey Hairs"

WSJ:

"One sign of easy credit is a recent deal to help Texas Pacific Group and

Leonard Green & Partners, two buyout funds, in their agreement to acquire retailer Petco Animal Supplies for $1.8 billion.

In September, the company said it would borrow $650 million to finance the buyout. Demand from lenders was so strong, the size of the offer was expanded earlier this month to $700 million, and the interest rate was reduced by a quarter of a percentage point.

This is the second go-round for Petco. It was publicly traded before the same buyout firms took it private in 2000. The firms again sold shares of the company to the public in 2002. Now they're taking it private again.

Back in 2000, banks could impose many conditions on buyout loans, for instance specifying how much cash flow the company had to generate to meet its debt and interest obligations. This time, there were virtually no such covenants on Petco loans.

"Before, banks could put in covenants, and covenants are what give us gray hair," Texas Pacific co-founder Jim Coulter said at a recent conference. "It is not just about the money. It is about the terms."

In the second quarter, such "covenant-lite" loan volume hit a record $8.6 billion. That amount fell to $2.1 billion in the third quarter, a sign that the Fed's rate increases might be starting to bite. Now, as Petco shows, such loans might be making a comeback."

Timothy Burger
timothyb(at)timothyburger.com