Financial Times reports that two private equity groups have taken a striking new step to protect themselves from any future downturn in the credit cycle by raising loans that remove most lenders' rights for the first time in Europe.

Financial Times reports that two private equity groups have taken a striking new step to protect themselves from any future downturn in the credit cycle by raising loans that remove most lenders' rights for the first time in Europe.

The "covenant-Lite" loan - or "cov-lite" - looks like a traditional syndicated loan, but doesn't carry the legal clauses that allow investors to track the performance of a risky borrower or declare a default if financial measures are breached.

Some bankers and lawyers regard the emergence of "cov-lite" structures as a sign that the European loan market is dangerously overheated. However, others say the trend is a natural development given that liquidity levels remain very high in leveraged finance - irrespective of the recent jitters in the subprime sector in the US. "With the market so hot, this is the next frontier," said John Markland, lawyer at Kirkland and Ellis.

The cov-lite loans have appeared in a financing package that JPMorgan is raising for VNU World Directories, a European directories company owned by Cinven and Apax Partners, two large private equity groups.

To read more about this story, go to ft.com

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