Covenant-Lite Issuance Casts A Cloud Over Future Default Levels

With the current hyper-liquidity in the capital markets, largely due to central bank “cheap-money” policies, and investors’ unquenchable thirst for yield, the issuance of covenant-lite first-lien loans, which lack financial maintenance covenants, has boomed in 2013 and thus far in 2014. Standard & Poor’s Ratings Services is concerned that the sizable amount of first-lien covenant-lite loans now outstanding, particularly those rated in the ‘B’ category, along with rapid growth in traditional ‘B’ first-lien loan issuance, could result in elevated refinancing risk and/or a spike in defaults in the event of a future liquidity crisis. (Watch the related CreditMatters TV segment titled, “Booming ‘B’-Rated Covenant-Lite Issuance Heightens Restructuring And Default Risk,” dated July 15, 2014.)

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