Twice as many covenant-lite loans issued today as in 2007

For a while there the world was acknowledging the peak of sub-prime, levered loan issuance in the 2007 credit bubble as the zenith of crazy, reckless behavior. Well that was then. Today memories are evidently blank once more. Courtesy of the Financial Times, see: Growth of ‘cov-lite’ loans sparks debate.”

“Sales of “cov-lite” loans that come with fewer protections for lenders have become the norm in the US rather than the exception.

“It’s death by a thousand cuts,” says a syndicate banker who is responsible for selling such loans to investors. “If an issuer sees one deal close successfully, they’ll ratchet the leverage and lower the covenants on the next one.”

Almost two-thirds of the leveraged loans now sold into the US market contain fewer covenants than traditional deals, according to data from S&P Capital IQ – eclipsing the 29 per cent proportion reached at the height of the LBO boom in 2007.”

Apparently the financially devastating game of credit roulette is back on with a vengeance. This is what happens when the perpetrators last go round were bailed out and granted a free pass to continue…round and round we go.

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