Thursday, March 27, 2014

Heavy Concerns About (Covenant) Lite Loans

Thanks to Jason at SentimenTrader for returning the issue of covenant-lite loan issuance to the front burner and shout out to Steve Han at SMB Capital for the heads up.  Cov-lite loans are ones that are made with fewer protections in place for lenders.  That raises fears of a repeat of low down payment mortgages back in the day.  Zero Hedge brought the issue to attention late last year; Forbes had a piece on the topic earlier that year. Just recently, FT discussed the growth of cov-lite loans in Europe.

Oppenheimer points out that cov-lite loans are not covenant free and do have protections in place.  Meanwhile, leveraged loans are off last year's pace but continue hot.  The issue of search for yield resulting in a reach for lower credit quality as a function of the low interest rate policies of central banks is an important one:  I'll be keeping an eye on how lite loan portfolios get.