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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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Tue, 02/12/2013 - 16:50 | 3237719 Say What Again
Say What Again's picture

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

Tue, 02/12/2013 - 18:11 | 3238000 Mister Ponzi
Mister Ponzi's picture

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

Tue, 02/12/2013 - 19:28 | 3238310 clara-to-market
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

Tue, 02/12/2013 - 16:50 | 3237720 Induced Coma
Induced Coma's picture

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

 

IC

Tue, 02/12/2013 - 16:52 | 3237726 Say What Again
Say What Again's picture

The answer to that question lies in the following;

http://www.zerohedge.com/news/2013-02-12/caption-contest-european-math-l...

Tue, 02/12/2013 - 16:50 | 3237721 John Law Lives
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

Tue, 02/12/2013 - 16:55 | 3237734 ebworthen
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.

Tue, 02/12/2013 - 16:58 | 3237744 Say What Again
Say What Again's picture

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

Tue, 02/12/2013 - 17:07 | 3237772 John Law Lives
John Law Lives's picture

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

Tue, 02/12/2013 - 16:57 | 3237741 GolfHatesMe
GolfHatesMe's picture

No risk of that.  <Timmay off>

Tue, 02/12/2013 - 17:04 | 3237763 q99x2
q99x2's picture

Thus Spake the Squiid.

Blankeind: This could be Threshold of a Bull Market.

Translation: Sell like no tomorrow.

Tue, 02/12/2013 - 17:08 | 3237776 Cognitive Dissonance
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. :)

Tue, 02/12/2013 - 17:07 | 3237773 moneymutt
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

Tue, 02/12/2013 - 17:39 | 3237872 NotApplicable
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.

Tue, 02/12/2013 - 17:08 | 3237774 moneymutt
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

Tue, 02/12/2013 - 17:16 | 3237781 Silverhog
Silverhog's picture

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

Tue, 02/12/2013 - 18:23 | 3238053 Tijuana Donkey Show
Tijuana Donkey Show's picture

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

Tue, 02/12/2013 - 17:15 | 3237788 wtf.gov
wtf.gov's picture

OT: Dorner reportedly in custody.

 

http://losangeles.cbslocal.com/live-video/

Tue, 02/12/2013 - 17:30 | 3237845 wtf.gov
wtf.gov's picture

Actually a shootout, 2 cops down.

Tue, 02/12/2013 - 17:16 | 3237793 Poetic injustice
Poetic injustice's picture

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

Tue, 02/12/2013 - 17:19 | 3237800 Mercury
Mercury's picture

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

Tue, 02/12/2013 - 17:29 | 3237812 youngman
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 can´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

Tue, 02/12/2013 - 17:25 | 3237826 css1971
css1971's picture

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

 

So who's buying? Pension funds you say?

Tue, 02/12/2013 - 17:42 | 3237892 NotApplicable
NotApplicable's picture

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

Tue, 02/12/2013 - 17:50 | 3237924 russwinter
russwinter's picture

Bloomberg: Fed Joining Alarm over Distortion it Enabled. 

http://www.bloomberg.com/news/2013-02-11/fed-joining-in-alarm-over-disto...

Tue, 02/12/2013 - 18:04 | 3237982 disabledvet
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.

Tue, 02/12/2013 - 18:21 | 3238043 nightshiftsucks
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.

Tue, 02/12/2013 - 18:58 | 3238188 trendybull459
trendybull459's picture

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

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