Covenant-lite loans: Through a glass darkly
Risky and unpredictable, covenant-lite loans are here to stay.
(This article appears courtesy of International Financial Law Review, sign up for a free trial on their site)
IFLR staff writer
"Markets can remain irrational longer than you can remain solvent," said economist John Maynard Keynes. The current debt market, some might have you believe, is both recklessly irrational and remarkably solvent. In fact, it's the solvency that's making things irrational.
"Welcome to the fin-de-siècle mood that is gripping high finance," editorialized the Financial Times in late May. "Buddy, just hand over that dime," said the Economist.
The financial press has pulled no punches in its coverage of the private-equity led M&A boom. And nothing seems to epitomize the markets' current decadence more than covenant-lite loans, which in the past few months, have broken into Europe.
Late May saw the fêted UK fund manager Anthony Bolton stridently criticize cov-lite loans in his departure speech from investment fund Fidelity. "It is only a question of when rather than if things go wrong," said Bolton. "I can't tell you when it's coming. I can tell you the pressures are there."
Covenant-lite loans are indeed risky creatures. Banks seem to be showing a remarkably candid recklessness in agreeing to ever more flexible terms, which is making market watchers uncomfortable.