DealZone

Private equity’s “golden age” is looking a little less shiny for lenders behind the LBO boom.

Here’s what has them nervous: many LBOs were in industries which are vulnerable in a downturn; borrowers were leveraged to the hilt after a buyout, and a lot of leveraged loans are “covenant lite” — which means they lack fundamental control mechanisms.

With the specter of a recession looming, that’s enough to make even the most solid LBO credit loose its luster — which may be why banks have struggled placing $2 billion in loans behind the LBO of computer retailer CDW Corp by Madison Dearborn and Providence Equity Partners.

And the leveraged loan default rate, while at a historic low, may not give much comfort — in the case of covenant lite loans, low defaults may mean low recoveries as companies deteriorate without triggering defaults.

Of the nearly $690 billion in leveraged loans issued last year, 10 percent were covenant lite, according to Reuters LPC. That’s up from 4 percent of the $612 billion issued on 2006. Below is a chart on covenant lite issuance from RLPC.