Cov-Lite Loans Hit Record In 2012 As January High Yield Covenant Protection Drops To New Lows

Tyler Durden's picture

Those who traded credit in the frothy days of 2007 will recall that virtually every piece of new paper, including LBO debt, would come to market with the skimpiest of creditor protections, i.e., "covenant lite" which to many was an indication that money was literally being thrown without any discrimination in the last epic chase for yield, just as many were preparing for the imminent market backlash. Which they got shortly thereafter. Judging by the amount of covenant lite loans issued in 2012 as a percentage of total and compiled by Brandywine Management, which just surpassed the credit bubble frenzy of 2007 at more than 30% of total issuance, the bubble in credit is now well and truly back - a job well done Federal Reserve, just 5 years after the last credit bubble.

And that's just for loans.

A quick look at high yield bond space shows exactly the same, with Moody's reporting that the covenant quality of North American high-yield bonds continued to slide in January, and has hit a new low in the month of January.

From Moody's:

Moody's Investors Service says in its second monthly report on its recently launched Covenant Quality Index (CQI). The index shows that covenant quality began to erode last July, at the same time that high-yield bond issuance started to climb.

 

"Our three-month rolling average CQI deteriorated to 3.89 in January from 3.79 in December," says Alexander Dill, Head of Covenant Research at Moody's and author of "Bond Covenant Quality Resumes Slide." "The single-month score for January was 4.08, a marked deterioration from 3.55 in December and the previous low of 4.06 in November."

 

The CQI uses a five-point scale, with 1.0 representing the strongest covenant protections and 5.0, the weakest. It peaked at 3.40 last July.

 

But investors are not being compensated for accepting weaker covenants, Dill says. "While investors are taking on more covenant risk, average spreads to benchmark yields have tightened, fueled by strong demand and a record volume of issuance." Indeed, the average benchmark spread of bonds in Moody's High-Yield Covenant issued since October is close to the level seen in the first half of 2011, though the CQI shows much weaker covenants.

 

Last month's decline can be explained largely by an increase in high-yield-lite issuance. High-yield lite covenant packages, which lack a restricted payments and/or a debt-incurrence covenant, accounted for 34.6% of issuance in January, compared with 3.2% in December. Continuing a recent trend to convert to high-yield lite from full high-yield covenant packages, Netflix, Lear and Crown Americas all issued bonds with high-yield lite packages last month.

 

January also saw a higher percentage of bonds rated Ba, which generally have high-yield-lite covenant packages or full covenant packages with low covenant quality. These accounted for 58% of issuance in January, compared with the average of 27% since Moody's began tracking the CQI in January 2011.

Luckily, just like in 2007, there is no risk at all of overheating: after all the Fed has a tremendous track record of intercepting bubbles in the credit, housing, and "stocks with an N/M PE multiple" asset classes. Surely they will deal with this one promptly and resolutely.

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Say What Again's picture

Moody says they're gonna give em all AAAAAAA+++++

Mister Ponzi's picture

How could it fall in the high yield category then???

clara-to-market's picture

I don't understand a word of this post.

Crazy, crazy, crazy.

I need to go back to school.

http://www.angrysinner.blogspot.kr/2013/02/yesterday-we-went-to-pizza-hut-for.html

Induced Coma's picture

What will be the pin to prick all these bubbles? How long must we sign this song?

 

IC

John Law Lives's picture

"...after all the Fed has a tremendous track record of intercepting bubbles in the credit, housing, and stocks with an N/M PE multiple sectors. Surely they will deal with this one promptly and resolutely."

The Great Chairsatan says he can control inflation within 15 minutes.  I am sure he would not exaggerate...

FED = FUBAR

ebworthen's picture

Some tool on CNBC this morning (of course) from an investment firm out of L.A. saying the recovery is here; beyond green shoots and mustard seeds - strong vines and turgid stems and all that. 

Ignoring, of course, the unpayable debt and FED QE to the moon.

A fine turgid BUBBLE the FED has blown again.

Bank bailouts part deux coming.

We lose again.

Say What Again's picture

California has one of the largest problems with student debt per capita.

John Law Lives's picture

Pretty amazing claim re. an economy that printed (estimate) a negative number for the previous quarter...

GolfHatesMe's picture

No risk of that.  <Timmay off>

q99x2's picture

Thus Spake the Squiid.

Blankeind: This could be Threshold of a Bull Market.

Translation: Sell like no tomorrow.

Cognitive Dissonance's picture

It was "Breaking News" on CNBC mobile. I texted Mrs. Cog with the good news and she promptly sold everything that wasn't tied down......except the precious metals.

I love Mrs. Cog. :)

moneymutt's picture

Off topic but want to promote this however I can, please support Australia alternative economist's Kickstarter campaign for his "Minsky" dynamic economic modeling software. It finally gets economic modeling on par with all other self-respecting engineers and scientists do, dynamic modeling. And it actually accounts for influence of bank debt on economy, something mainstream economists ignore.

http://www.kickstarter.com/projects/2123355930/minsky-reforming-economics-with-visual-monetary-mo

NotApplicable's picture

Honestly, I don't see how a better model can help when all data is corrupted beyond compare.

We are through the looking glass, and thus reflections lose all meaning.

moneymutt's picture

Off topic but want to promote this however I can, please support Australia alternative economist's Kickstarter campaign for his "Minsky" dynamic economic modeling software. It finally gets economic modeling on par with all other self-respecting engineers and scientists do, dynamic modeling. And it actually accounts for influence of bank debt on economy, something mainstream economists ignore.

http://www.kickstarter.com/projects/2123355930/minsky-reforming-economics-with-visual-monetary-mo

Silverhog's picture

Hey, CNBC showing Lloyd Blankfein growing half ass beard. Must be preparing for the incognito with common folks.

Tijuana Donkey Show's picture

That means he's close to retirement. We call that the Ken Lay.....

wtf.gov's picture

Actually a shootout, 2 cops down.

Poetic injustice's picture

Make it bigger, Ben! Make bubble to the Moon, and blow up it with power of 1000 suns!

Mercury's picture

And thanks to super-ZIRP those high yields are lower than the last time cov-lite was all the rage.

youngman's picture

I said it before..if you are a lowly administrator at a pension fund and you need 8% returns to survive...you are chasing any returns you can find...you do not care if you get paid back the inital investment....that shows up on someone elses balance sheet like when the bubble bursts...they canĀ“t blame that on you ...but if you can show a 4-6% return...you be da king....DA KING....oh my ...oh my ...me oh me oh my oh....ITS FAT TUESDAY...GOTS TO GET ME SOME KINGS CAKE....OFF TO BOURBON STREET I GO....

http://www.earthcam.com/usa/louisiana/neworleans/bourbonstreet/?cam=catsmeow2

css1971's picture

So.. Corporate bond bubble? What could possibly go wrong?

 

So who's buying? Pension funds you say?

NotApplicable's picture

Better yet, who's selling? AIG? Jamie? Lloyd?

disabledvet's picture

This is the proverbial "meat on the bone." I'm still not a bear but obviously when your political class goes yet again for "full on land war in Asia" you know there's a problem with the plumbing. "not all debt is created equal" and how many have been sold the line "we're part of the bailout train" remains to be seen. It will be seen...and heard. Of that I have no doubt.

nightshiftsucks's picture

They have to know this is going to end badly. It seems like the elected officials of this country know it's going to collapse and they are trying to get ready for it or they are the most incompetent humans beings ever to walk the face of this planet.

trendybull459's picture

http://trendybull777.blog.com/2013/02/12/world-new-orderin-russianwhat-to-expect-from-future/

injoy your last freedoms,read why in the near future you all will be leaving under much worth leader that Stalin was,Elite should prepare testoments,your last days counted FED,prepare for changes,working for change!Because most of you worthening midlle class conditions,you are blind in your greedy habits to leave some change to poor and middle,then you will loose all like it was many times in hystory under the New Order which not you,others will do very soon!