Covenant-Lite Loan Issuance Hits New Record

Institutions in search of yield are gobbling up loans with little protection, at riskier and riskier spreads.

Record-breaking chart from LeveragedLoan.Com.

  • The share of outstanding leveraged loans that are covenant-lite crept to another record high in February, reaching 75.8%, according to LCD and the S&P/LSTA Loan Index.
  • At the end of February the amount of U.S. leveraged loans outstanding was $984 billion, meaning there is now $745 billion of covenant-lite loan debt held by institutional investors.
  • The share of outstanding cov-lite loans matches the rate that newly-issued loans are cov-lite, according to LCD. Of the nearly $92 billion of U.S. leveraged term debt issued so far this year, $69 billion is cov-lite, according to LCD.

More Risk, Less Return

  • First-lien leverage on loans backing U.S. LBOs has crept to a record-high in 2018 as yield-starved institutional investors flock to these deals, looking to put huge cash stores accumulated over the past 18 months to work.
  • Those yields aren’t what they used to be, however. Indeed, by one metric, LBO loans are less attractive for an investor now than at any time since the financial crisis.
  • Specifically, LBO loans this year offer institutional investors 75.1 bps of spread per unit of leverage (SPL). That’s down noticeably from 87.5 bps last year and 111.5 bps in 2016, according to LCD.

Recklessness prevails, still.

Institutions buying junk bonds and other such garbage are about to get clobbered.

Mike "Mish" Shedlock

No. 1-10

There are even more oddities in credit land, see "From Bling to Plonk" at Acting Man: As an aside, leveraged loans are packaged into CLOs and banks are funding hedge funds taking positions at leverage ratios of up to 1:10, reminiscent of the margin loans provided by the Wall Street bucket shops of yore.


It gets worse when you take a look at the financials, and I use that term loosely, that are being used. The constant on the fly adjustments, often because of the heavy involvement in constant M&A these borrowers are involved in use. The numbers are simply pure fiction, with little or no explanation for the adjustments to what the prior numbers are. To actually get a real in time set of financials is nearly impossible with may if not most of these loans.


This is 2007 all over again and the end result will probably be worse than what happened in 2008. The financial and investing world is inhabited by greedy fools!!!


Yeah but UNTIL the music stops, the fund managers will outperform their benchmarks. Thus I propose a new fixed-income measure which will be extremely useful right up until the music stops:
Yield-To-Default = net gaap recognizable income / true bond value

Income includes any PIK or deferred coupons.

True bond value ignores the market price, which can be wrong. It is the higher of cost or Level 3 accounting mark.

This measure is perfect because while everything is fine it tracks perfectly with measured portfolio returns. After the crash - well it doesn’t matter anymore as your pension fund is already bankrupt.

Although I think it needs a catchier name.