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"What The Bubble..." Chart Of The Day: Half Of Loans Issued In 2013 Were "Covenant Lite"

Tyler Durden's picture


If you ask anyone at The Fed (apart from Jeremy Stein) if there is a bubble in the credit markets, the answer is definitive "no" since bubbles are always obvious. Well, hopefully, the following chart will make it "obvious" that the Fed's policy has driven a 'reach for yield' so excessive as to explode the growth of so-called cov-lite loans. This 'riskiest of risky' loan issuance, while already at record high levels, has now massively exceeded the previous bubble in terms of percent issued as the demand for anything with yield 'enables' the worst of the worst companies to refinance their zombie-like existence.

Of the $644.4 billion loans issued, $293.35 billion was Covenant-lite...


Cov-lite issuance is over 45% of all loan issuance in 2013!!!

(bear in mind that the great majority of this issuance is being used for refinancing - not capex or growth-related spending)

In context - that is more than double the amount of the last bubble peak!!


With firm leverage at record highs...


...and record margin debt in stocks, as we warned two months ago, record-high exposure to these risky credit structures (and the re-emergence of CLOs to concentrate them) is, we are sure, nothing to worry about... because it's different this time.


[Addenda: while December is always a slower month, we do note that Cov-Lite issuance is at its lowest since the mid-sumer Taper tantrum... - perhaps risk is being repriced a little?]


Source: Bloomberg


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Mon, 12/30/2013 - 17:00 | Link to Comment skree
skree's picture

I admit that I am ignorant- would someone with knowledge explain to me what "Cov-lite" is? Perhaps even without being snarky?

Mon, 12/30/2013 - 17:04 | Link to Comment Jason T
Jason T's picture

I just looked it up myself..


A type of loan whereby financing is given with limited restrictions on the debt-service capabilities of the borrower. The issuance of covenant-lite loans means that debt is being issued, both personally and commercially, to borrowers with less restrictions on collateral, payment terms, and level of income.

Mon, 12/30/2013 - 17:10 | Link to Comment philosophers bone
philosophers bone's picture

Recall 2006 / 2007 - a "borrower's market", "there is so much capital required to be deployed, lenders cannot demand onerous covenants".  Basically changed overnight.  Same old.

Mon, 12/30/2013 - 17:10 | Link to Comment idea_hamster
idea_hamster's picture

"Sub-prime" is a dirty word -- gotta call it something, tho!

Mon, 12/30/2013 - 17:16 | Link to Comment stutes33
stutes33's picture

Not quite.....sub prime refers to mortgage loans

Mon, 12/30/2013 - 17:17 | Link to Comment idea_hamster
idea_hamster's picture

If the only difference is the collateral, I'm thinking my point is valid.  :-)

Mon, 12/30/2013 - 17:07 | Link to Comment Winston Churchill
Winston Churchill's picture

Liar loans by another name.

Mon, 12/30/2013 - 17:06 | Link to Comment skree
skree's picture

Ohhhhhh....THAT'S why my funder friend is working overtime today. We're right back where we where in 2006 then....nothing has changed.

Mon, 12/30/2013 - 17:40 | Link to Comment Winston Churchill
Winston Churchill's picture

Actually we have progressed from 2006.

Its four times worse when you factor in the CDS and other derivatives


When this blows, 2008 will seem like a tea party in comparison.

Mon, 12/30/2013 - 17:48 | Link to Comment negative rates
negative rates's picture

You're given credit for your prior dry powder actitivities off the books like, then if the funds dry up, your lite on your loan, or covenant lite loan.

Mon, 12/30/2013 - 18:46 | Link to Comment max2205
max2205's picture

Should I panic now or wait 5 years

Mon, 12/30/2013 - 21:23 | Link to Comment Ellesmere
Ellesmere's picture

Covenant Light - debt not subject to restrictions as to use, financial ratios to maintain, payback terms, etc. as would be normally seen.

The updated version of bad mortgages if you prefer, only extended to business borrowers.

Mon, 12/30/2013 - 17:00 | Link to Comment Jason T
Jason T's picture

There is a lot of dead wood sitting in the economy.. this next economic fire will be the nastist one yet.  



Mon, 12/30/2013 - 18:13 | Link to Comment ReactionToClose...
ReactionToClosedMinds's picture

no one can predict the future ..... but agree very much so ..... there is more tinder wood now than early 2008. And not sure QE + ZIRP working quite as intended.   But Global financial services firms are loving it ......

Mon, 12/30/2013 - 17:02 | Link to Comment stutes33
stutes33's picture

ptentially more risky....protective covenants stripped out

Mon, 12/30/2013 - 17:08 | Link to Comment Rukeysers Ghost
Rukeysers Ghost's picture

No need to panic. Cov Lite loans are still under 50% of the total loans being done. Everything is great. Green shoots everywhere. Keep borrowing and spending. Nothing to see here. Move along everyone.

Mon, 12/30/2013 - 18:16 | Link to Comment Colonel Klink
Colonel Klink's picture

(Tiptoeing to the bank and quietly removing all but a small amount of my funds)

Go banks!

Mon, 12/30/2013 - 17:07 | Link to Comment Yen Cross
Yen Cross's picture

     Quick everyone... Get ya some of those Ninja loans, before the well goes dry.

Mon, 12/30/2013 - 17:12 | Link to Comment Verum
Verum's picture

how about an annual nominal cov vs cov-lite to provide prospective

Mon, 12/30/2013 - 17:17 | Link to Comment Colonel Klink
Colonel Klink's picture

OK but which ones are the taxpayers on the hook for when the banks implode?

Mon, 12/30/2013 - 17:19 | Link to Comment El Vaquero
El Vaquero's picture

I'll take "All of them" for $800, Alex.

Mon, 12/30/2013 - 17:29 | Link to Comment Colonel Klink
Colonel Klink's picture

Tell'em what he's won Johnny!

Alex, he's won a buttload of worthless impaired loans backed by worthless collateral!  All paid for via a corrupt government on the backs of the middle class taxpayers!  But wait, there's more.  LAAAARGE BANKSTER BONUSES!!

:golfclap: (in the background)

Mon, 12/30/2013 - 17:15 | Link to Comment Bunga Bunga
Bunga Bunga's picture

Calm down, taxpayer will always bail that out. 2008 was just a small test.

Mon, 12/30/2013 - 17:41 | Link to Comment debtor of last ...
debtor of last resort's picture

And what about the bond markets? All gov-lite?

Mon, 12/30/2013 - 17:59 | Link to Comment Ned Zeppelin
Ned Zeppelin's picture

Friends, if you are looking for an analog to this situation, look no further than the Liars Loans, No-Doc loans, Neg Am "payment option" loans and other deranged specimens of investment banker thinking that brought down the house last time. This debt is equally suspect.  It is courtesy of the Fed that no one thinks twice about this, thinking the Fed "has their backs." They do, to a point. 

You really get the feeling that the run up to 2008 was nothing more than a test run for all out insanity. 

Mon, 12/30/2013 - 18:15 | Link to Comment disabledvet
disabledvet's picture

I don't know what bailout they'd be expecting. The Fed just popped this bubble in the summer. this is free market capitalism now. "and you may dispense with the bullshit."

Mon, 12/30/2013 - 18:29 | Link to Comment Winston Churchill
Winston Churchill's picture

You believe the Fed ?

They will do whatever it takes to save TBTF icluding lying to J6P.i

Mon, 12/30/2013 - 18:19 | Link to Comment SmittyinLA
SmittyinLA's picture

the mass immigration movement is funded primarily by home loan fraud supporting municipal bond fraud, it has to continue to keep their immigration agenda movement funded. 

Without increasing property tax revenues every year the immigrtation beast goes hungry. importing and subsidizing millions of alien "breeders" cost money and you can't feed the hungry with "economic growth", they take real food and energy to support. 

Mon, 12/30/2013 - 18:45 | Link to Comment illmatic
illmatic's picture

And yet central bankers continue to claim: "we cannot detect bubbles." Sigh...

Mon, 12/30/2013 - 18:53 | Link to Comment Spungo
Spungo's picture

Don't worry. The central bankers have everything under control. They have doctorate degrees in economics don't ya know.

Tue, 12/31/2013 - 01:10 | Link to Comment Colonel Klink
Colonel Klink's picture

I believe they also call that a PHD, Piled Higher & Deeper!

Mon, 12/30/2013 - 19:54 | Link to Comment Clowns on Acid
Clowns on Acid's picture

This type of loan activity happens just after the Fed begins dropping USD's from the metaphorical helicopter to special people, and just before the Fed begins dropping USD's from a real helicopter to less special people.


Thu, 01/02/2014 - 00:54 | Link to Comment TrulyStupid
TrulyStupid's picture

I'll gladly pay you Tuesday for a hamburger today..

-J. Wellington Wimpy

Thu, 01/02/2014 - 04:43 | Link to Comment niphtrique
niphtrique's picture

The post touches the root of the problem, which is interest on money. Think of the following:

- Compound interest is infinite (in the long run). If you have a limited amount of currency units, and borrowing against interest, problems will occur. Hence, there is a perceived need to print additional currency units.

- That brings us to the following issue. To deal with those problems, fiscal policies and monetary policies have been invented. This distorts markets as it favours politically connected businesses. Those policies may work in the short run but in the long run, it leads to increased debt levels and interest payments.

- There is another nasty issue. Interest is a reward for risk but interest on money also increases risk and contributes to financial instability by pressing the hardest on the weakest borrowers. People and businesses with bad credit pay high interest rates but cannot afford to, but because they have bad credit, they have no other option.

- The financial sector is rewarded for taking risks with interest on money, while governments and central banks are expected to step in when things go wrong. This may facilitate credit expansion and profits in the financial sector at the expense of the real economy. It may explain why the US financial sector comprised only 10% of total non-farm business profits in 1947, but grew to 50% by 2010.

We all know that interest is a natural phenomenon as without interest on capital the economy would cease to operate. Interest on money reflects interest on capital so it cannot be avoided. The solution is:

- to have a constant amount of currency units (in order not to have inflation);
- to have a maximum nominal interest rate of zero (to avoid the problem of compound interest);
- have a tax on holding money (in order to make lending out money at zero percent interest attractive and to make the private sector and not the government provide a constant stimulus).

In this way the value of the money can rise when the economy grows and real interest rates can be positive. If the economy contracts, real interest rates can go negative and provide more stimulus without government intervention. This is the idea in a nutshell. It is explained in more detail here:

Wed, 01/08/2014 - 18:34 | Link to Comment starman
starman's picture

Bear Sterns ~AIG ~bear steals ~AIG, what I'm singing and old tune.

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