American Bankruptcy Institute e-newsletter of 5/9/19 reports RISK from over-leveraged debt, from over-borrowing by corporations
For fund managers, it’s easy to be picky when money is tight, but not so simple when they’re rolling in cash, according to a Bloomberg commentary on Tuesday. Leveraged-loan investors are suddenly willing to push back on the pervasive weakening of covenants, the safeguards in offering documents that are meant to protect creditors. In January, Moody’s Investors Service determined that covenant quality in leveraged loans was the worst on record in the third quarter of 2018. It hasn’t gotten much better since. On Monday, the Federal Reserve echoed that sentiment, further amplifying its warnings about risky corporate debt in a twice-a-year financial stability report. “Credit standards for new leveraged loans appear to have deteriorated further over the past six months,” the Fed said, with its board voting unanimously to approve the document. “The historically high level of business debt and the recent concentration of debt growth among the riskiest firms could pose a risk to those firms and, potentially, their creditors.” It might be too little, too late for investors to get tough on leveraged-loan issuers, according to the commentary. Already, UBS Group AG estimates that loan owners may end up recouping about 40 cents on the dollar in a downturn, potentially less than half what they’d historically expect to get. Moody’s has estimated recovery rates of 61 percent on first-lien loans and 14 percent on second-lien obligations in a recession, down from long-term historical averages of 77 percent and 43 percent, respectively.