Courtesy of Mish.
With the Fed forcing interest rates low, commercial and industrial lending has picked up. That may sound like a good thing, but is it?
I suggest it’s not. Competition is such that “covenant light” lending has returned in full force. “Cov-lite is financial jargon for loan agreements which do not contain the usual protective covenants for the benefit of the lending party.“
Flood of Cheap Money Sparks Covenant Light Lending
Please consider Covenant-light lending making its presence felt again
Competition is feral at the institutional end of the banking industry, where quantitative easing is creating a flood of cheap money, and in the big banks a recent development has everyone talking: covenant-light lending appears to be making a comeback.
Covenant-light loans were a phenomenon of the boom that ushered in the global financial crisis. Bankers who say covenant-light lending is on the rise again say loans that are being proposed now are not as radical as the ones created ahead of the crisis, but say they are watching closely.
Covenants are designed to protect lenders from corporate implosions. They impose financial limits on the borrower, maximum gearing levels, for example, and if they are breached, the lenders can take steps to protect their position.
Bankers say now that US banks and investment banks are leading the revival of covenant-light lending. They are surprised it has returned so quickly, but acknowledge that quantitative easing has created enormous pressure.
Their best guess is that covenant-light lending is back to where it was around the middle of 2006, before the final, frenetic stage of the boom. It is lighter-covenant rather than covenant-free lending, and it is only being offered to top-rated corporations where survival and debt servicing capacity is not in question.
The local bankers wonder, nevertheless, whether the return of covenant-light lending is a sign of QE seeding another unsustainable debt boom, but they still need to work out how to respond: if the trend continues and they don’t join it, their share of the institutional lending market will fall.
J.C. Penney Loan Arranged by Goldman Sachs Is Covenant-Light
On April 29, Bloomberg reported J.C. Penney Loan Arranged by Goldman Sachs to Be Covenant-Light
J.C. Penney Co. (JCP), the retailer that’s working to rebound from its worst sales year, will offer fewer safeguards to lenders on its $1.75 billion financing….
