| Crunch time for LBOs |
Why covenant-lite CLOs are the next accident waiting to happen
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SOMETIMES THINGS JUST don’t seem quite right. "One good thing about the rapid growth of covenant-lite leveraged loans is that even if things go wrong these loans are not going to fall over for a long time," mused one CLO manager recently. "The borrower only has to pay their interest bill as there is nothing in the documentation for them to trigger." Thus, with no pesky covenant triggers to breach, these assets can sit in the CLO without causing any disruption, even if the performance of the borrower seriously deteriorates. And remember – this is a good thing.
This view is admittedly the exception rather than the rule among CLO managers – most of whom express a growing discomfort with the covenant-lite loan phenomenon.
