Before the credit crunch, lenders gave away the store in a flood of cheap covenant-lite leveraged loans that put few restrictions on borrowers. Now, those same lenders find conditions ripe for payback.

Recently, borrowers seeking loan amendments or refinancings have been confronted by lenders asking for more restrictive covenants to debt agreements and higher interest rates.
Take Dole Food Co. of Thousand Oaks, Calif., which earlier this month asked senior lenders for amendments to its loan agreement that would allow it to issue up to $500 million of second-lien debt.

Dole wanted to issue the debt to refinance $345 million in bonds maturing in May, but needed permission from senior lenders to proceed.

According to Standard & Poor's Leveraged Commentary & Data unit, holders of senior debt wanted to increase the price to LIBOR plus 450 and a 2.75% LIBOR floor, up substantially from the original pricing of LIBOR plus 200.

Not only would that ensure quarterly interest payments of at least 7.25%, but the repricing demand was sweetened with a 50 basis point amendment fee. The term loan also gained a covenant, forcing Dole to maintain its debt-to-Ebitda ratio at 3.25 times.

Other companies going to lenders with amendments include GateHouse Media Inc., a community newspaper publisher based in Fairport, N.Y. In January, GateHouse asked for an amendment to its covenant-lite $1.2 billion credit facility, looking to buy back debt at prices below par. The C-rated company got the amendment after agreeing to pay a 5 basis-point fee. According to S&P, GateHouse now must show that it has excess liquidity of $20 million -- cash plus money available through its revolving credit line -- before it can buy back debt at market value.

Covenants can take many forms, but they are essentially restrictive clauses in loan agreements that force borrowers to meet specific benchmarks or keep them from incurring debt beyond a set level. They were virtually unheard of in the heyday of the credit boom. There are 185 covenant-lite loans on the S&P Loan Syndications and Trading Association leveraged loan index, representing 17.83% of the index. The majority of those loans were made between 2005 and early 2007, and in the absence of unusual events, it's likely most borrowers will be happy to keep them on their books unamended, says one banker. "There are not many cases where covenant-lite deals need to be addressed," he says. Barring payment default where companies can no longer meet their interest payments, he says, most of the vintage 2005-2006 deals are benefiting from the lack of covenants.

Companies that are still solvent, though struggling, are not being forced through technical pressure to renegotiate deals with banks, and are happy to keep the easy money. "The idea of covenant-lite is dead," says a market source. "But if you can manage it, why wouldn't you keep those loans on your books?" On the other hand, difficult economic times are also encouraging some companies to take further advantage of generous loan provisions offered during the good times.

Take chipmaker Freescale Semiconductor Inc., which a consortium of Blackstone Group LP, Carlyle Group, Permira Funds and Texas Pacific Group (now TPG Capital) bought in 2006 for $17.6 billion. Earlier this month, it made an exchange offer to its bond and senior debt holders. As of last week, the company's loans were trading at less than 50% of par and many of its bonds were trading below 15%. To take advantage of these depressed levels, the company is exercising an "accordion provision" to extend its loan agreement and issue about $1 billion more of debt and exchange it for existing bonds and senior debt. If successful, the exchange will reduce Freescale's debt and extend their maturities, giving CEO Richard Beyer's company some breathing room in a difficult economy. The new loan will be sold at 75% of par, with a fixed 12.5% coupon, according to filings with the Securities and Exchange Commission. Although that original issue discount will push up the new loan's yield to 17.5%, it's unclear how investors will react to Freescale's offer. As they debate the legality of Free­scale's move, market speculation suggests lawsuits might be in the offing.