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

Comments (10)
No. 1-10
Stuki
Stuki

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

…….until they put some dumb stooge on teevee chanting “the syyyystem wiiillll coooolapse!!” Whereupon the Fed and Government will bail them out, by debasing and indebting all those who didn’t buy the garbage….

Sechel
Sechel

Time to bring out the Hyman Minsky. This was inevitabe. issuance of subprime assets of various types have been on the upswing for some time now.

QTPie
QTPie

There will be tears.

Carl_R
Carl_R

Great data, Mish. Thanks.

Snow_Dog
Snow_Dog

“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.”

This is what “putting to work” means? A bunch of shifty subprime borrowers will speculate on the latest trend in malinvestopia, funding their schemes with institutional lenders who should know better. Yep, I see GDP soaring above 3% in 2018.