While protections are tighter in the private loan market, it’s moving in step.” Now, 77.6% of all outstanding loans are ‘cov-lite’, according to S&P Global. Back again?Īnother word for “protections” in that context is “covenants”, which the article describes as “the emergency alarms triggered by credit-negative signs”.Ĭovenant-lite deals, it adds, have “re-emerged and spread across the syndicated loan market. And it continues: “Another worry is that, in the fever of competition, investors aren’t demanding the kinds of yields and protections that would help cushion losses.” Covenants. In their place, the piece notes, “investors have been pouring into direct-lending funds in waves, eager to share the profits of lending to companies either too small or too risky to be bank clients”.Īs Barron’s points out, the risk here is the same as ever – “that companies struggle to make interest payments and default, and that investors’ money will evaporate”. “Covenant-lite loans now account for almost 35% of all loan issuance in America,” the piece observed.įast-forward to July 2018 and a Barron’s cover story, headlined Wall Street rushes into a new asset class, which focuses on the rise in direct lending stemming from a reluctance on the part of banks to lend to certain types of business. Specifically, the article referred to this type of borrowing being used by private equity firms to finance leveraged buy-outs (using a signifcant amount of borrowed money to buy a company) and highlighted how one such business had sought the previous month to raise a record $16bn (£12.2bn) of covenant-lite loans ahead of a single deal. And the first of a trio of what we tend to call “red flags” but The Economist piece characterised as “habits that in more sober times would have had lenders reaching for the Alka-Seltzer”: 'covenant-lite loans'. That was a time when people were still coming to terms with global debt levels and what they might mean for markets. Search The Economist’s database around 2007, for example, and a number of pieces on the subject will come up – including You only give me your funny paper, which was published the week after one of the key harbingers of the financial crisis: the demise of two Bear Stearns hedge funds Global debt levels On that note, our recent article on the growing popularity of so-called ‘covenant-lite loans’ sparked some real feelings of déjà vu. This is generally seen as the moment the global financial crisis kicked in in earnest and much of the recent commentary has focused on the lessons that have been learned in the decade since 15 September 2008 – or indeed not learned. Even if you have only been dipping into the financial pages this month, it probably has not escaped your attention that Saturday was the 10 th anniversary of the collapse of Lehman Brothers.