THE LMTR EDGE:

Join over 25,000 investors and get alerts for:
  • Market Timing Reports
  • Sentiment Updates
  • Chart of the Week
  • Weekly Podcasts
  • The Magic Number - Top Stocks

 The Growth of “Covenant Lite Loans” and Potential Big Risk to the Stock and Bond Markets and the Economy

The Growth of “Covenant Lite Loans” and Potential Big Risk to the Stock and Bond Markets and the Economy. “This will end poorly,” says Anton Pill, managing partner at J.P. Morgan Asset Management.  What he was referring to is the tremendous growth  (see charts below) of highly risky so-called “covenant lite loans,” which carry hefty interest rates and are used to finance leveraged buyouts and mergers and acquisitions that can have uncertain outcomes. They are also a debt market of last resort for financially troubled companies.

“Covenant lite” means there’s no guaranteed protection for investors who buy these loans(nor early warning) if they default. Moreover, loan quality is hitting record lows when you compare debt to earnings in the form of EBITDA.  Recently about 85% or more of leveraged loans were covenant lite. These loans are bundled together as collateralized loan obligations (CLOs) and sold to institutional buyers such as pension funds, as well as retail investors through mutual funds. These investors are taking on big risk for higher returns.  Does all this sound familiar?  Bank of England Governor Mark Carney sees parallels between the covenant lite market and the subprime mortgage market that led to the 2007 financial crisis. Back then low standard and often fraudulent mortgages were bundled as CLOs and sold to investors seeking outsized returns that turned into no returns.  To paraphrase Yogi Berra, “ Is this déjà vu all over again?”

The Growth of “Covenant Lite Loans” and Potential Big Risk to the Stock and Bond Markets Investors and the Economy
The Growth of “Covenant Lite Loans” and Potential Big Risk to the Stock and Bond Markets Investors and the Economy

See More Chart of the Week Posts:


Brad Lamensdorf

Brad Lamensdorf, the founder and portfolio manager of Active Alts, is a principal and co-manager of the AdvisorShares Ranger Equity Bear ETF. He previously managed a long-short investment partnership from 1998-2005 under the name Tarpon Capital Management. Earlier in his career Mr. Lamensdorf was an equity trader/market strategist for the Bass Brothers’ trading arm. He managed a short only portfolio in addition to co-managing a $1bil hedging program. He also served as in-house market strategist for the entire internal and external network of Bass Brothers money managers.

Leave a Reply

Your email address will not be published. Required fields are marked *

2018 - All Rights Reserved © LMTR, LLC

Privacy Policy - Contact Email: info@lmtr.com