Friday, May 25, 2007

Loose commercial lending standards bodes ill

The highly leveraged loan market has surpassed the junk-bond market, owing in part to bankers' innovation in the form of "covenant lite" loans, which lack the strictures that senior obligations traditionally carried. In other words, pretty much anything goes.

Covenant-lite loans accounted for only 5% of the market in 2006, $24 billion out of $480 billion of total loans, according to Penniman. So far this year, "cov-lites" total $70 billion out of $237 billion, he says.

Traditional loans typically had maintenance tests, which required the borrower to meet various financial standards, such as multiples of coverage of debt service or collateral. Now, borrowers will refinance their old loans with cov-lites to free themselves from those constrictions, Penniman explains, allowing the companies to use those assets to obtain more loans to further lever their balance sheets.

Indeed, such is the demand for loans with any extra margin of yield that the attitude of some investors is to buy first and ask questions later. If you insist on due diligence, you don't get any allocation. articl...ives_weekday_r1

Now is the time to put your investments in cash...if you participate in this insanity, you are going to lose your shorts....the root cause of the irrational demand for yield is the promises that pension funds and institutional investors have made to their stakeholders...ironically many of these pension funds are those of unionized workers who theoretically would be opposed to corporate greed...the companies that are levering themselves are merely using the cash from the debt to keep themselves from collapsing now...

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