Covenant-lite CLOs: From sub-prime to the ridiculous
The recent disruption in the US sub-prime mortgage market served as a warning to the CDO market of what happens when deals are backed by increasingly risky underlying assets. So why aren’t CLO managers – who are now buying single-B rated, covenant-lite loans in their droves – paying more attention? Louise Bowman reports.
Crunch time for LBOs
Why covenant-lite CLOs are the next accident waiting to happen
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.