Even if you haven't read May 2019's Financial Stability Report from the Federal Reserve or read the reports of Sir Jon Cunliffe's concerns about leveraged lending, we all know that the authorities are anxious about the number of poor quality, highly levered companies who have borrowed ?covenant lite? or 'security lite?. They pose challenges to all stakeholders, banks, distressed investors and private equity investors. ?Covenant lite? is not the only issue facing the industry - over the last ten years the structure and documentation of European leveraged lending has increasingly conformed to what is marketed in the US, disregarding that the more likely restructuring process won't be Chapter 11.

In short, sponsors, equity owners and investors in corporate debt are going to be facing very different strategic dilemmas when the company (or companies) they have invested in get into financial distress. In the last ten years the European leveraged market has grown to over US$2.4 trillion but only 20 per cent is on terms that contain traditional financial maintenance covenants (FMC) - in fact, this proportion is further reducing. 

Asked how the absence of FMC will impact restructurings, debt investors will say that without the prospect of imminent covenant breach, a borrower will not need to take steps to address its financial problems before it imminently faces the covenant breach that it can't escape - failure to repay. That can be a long way off - sponsors can delay topping up the equity until the problems have become critical. Delay has an option value.

Sponsors will say that debt investors are being simplistic and hostile. First, their motives aren't always noble - they could want to loan-to-own or to make a turn on the value of the debt they have bought cheap. The failure of the company is also an attractive outcome as the debt investor holds CDS protection. They are also responsible shareholders. Each board member is fixed with fiduciary duties to promote the success of the company. When insolvency looms, that duty means considering the interests of creditors.

The restructuring industry - investors in debt and equity - has got to figure out how to preserve and enhance value when ?covenant lite? borrowers will be severely tested. That calls for the industry to have a hard look at the problems and find solutions. 

As part of that conversation we are holding a breakfast event at Fortnum & Mason on 11 June. We shall begin by interviewing the leading UK judge in the restructuring field, Mr. Justice Snowden, and the former Judge James Peck of the US Bankruptcy court, who presided over the Lehman group insolvency from the first day and for the following five years. After that an expert panel will talk to these crucial issues. Click here to register for this event.