Loans for the asking: fueled by record liquidity and amped-up deal activity, financing is hitting new records. Lenders are so eager that some deals are being done without covenants.

• Author: Marshall, Jeffrey
• Position: FINANCING

Borrowers, form a line: the credit spigots are wide open.

It's hard to imagine a better scenario these days for corporate borrowers. Lenders of all stripes, from commercial banks to asset-based lenders to hedge funds, are tripping over themselves to put out money. And they don't seem to be concerned about risk, although the ripples in the market from Wall Street's late-February swoon may yet be felt.

Much of this boom has been driven by the surge in private equity and particularly by big PE firms taking companies private (see Special Report in the March issue). But it's more than that. Corporate default rates are at record lows, at just 1 percent. Liquidity is at record levels, and loan spreads have been shrinking as fears about risk have dissipated.

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"The spreads between triple-A debt and high-yield [debt] are very low--there's just not a lot of risk premium," says Bob Filek, a partner in the Transaction Services group at Pricewaterhouse-Coopers. "You could say that's justified--the deals right now are working.

"Everyone is in the game," Filek adds. "Commercial banks are happy to be more aggressive, and the hedge funds getting into more risky [tranches]. High-yield volume is way up. Banks are willing to step up and put money to work in large quantities. And, the larger the deal, the more competitive the financing. Now, when we're doing deals, within two months, we are getting proposals to refinance."

"Debt facilitates the activity in the M&A market," Matthew J. Lori, managing director of CCMP Capital, told Folio magazine recently. "You can get mezzanine financing at 11 percent these days. You used to have to pay 15 percent."

Consider, too, the fact that many financings are being done without loan covenants. That was unheard of years ago, when lenders were careful to monitor covenants and could quickly send a company into default if it ran afoul of the terms in the documents.

"Having no covenants represents a tremendous change," says Robert McCarrick, senior managing director of corporate finance for GE Healthcare Financial Services (HFS). "A few years ago, we would have four or five in a deal; now, we're down to one or none."

The tone for 2007 was clearly set by a robust 2006. "There was, it seems, no bad news in the 2006 loan market," noted Reuters Loan Pricing Corp. in an overview report on the past year. "And yet, when they got past exulting about the remarkable year, lenders say they do think about the quality of...