Covenant-Lite Leveraged Loans: Time-Tested or Time Bomb?
In 2011, Moody’s Investors Service developed a covenant quality index for high-yield bonds that evaluates and scores various covenant protections in new bond offerings and converts these scores into an index value. This methodology recently produced the lowest monthly score since the index’s inception. Moody’s noted that half of the speculative-grade bond issuances in the second quarter of 2017 had no restricted-payments covenant and/or debt-incurrence covenant, leaving many wondering why lenders/credit investors would so willingly concede these protections and whether it will ultimately end badly for them. In a recent American Bankruptcy Institute Journal article, Mark Laber, a Senior Managing Director, and John Yozzo, a Managing Director, focus on covenant-lite loans, one aspect of the changing dynamic in leveraged credit markets.