To the dismay of regulators, investors are increasingly embracing to higher credit risk for the potential of higher returns.
“Covenant-lite†loans are growing rapidly after almost disappearing during the 2008 credit crisis. This can be a salve for smaller companies already burdened with debt. And it can leave investors blind to financial trouble that would be reported in other loans.
Lynnley Browning reported that banks have ceded their role in leverage loans to private equity firms. Those shadow banking players use leveraged loans to bankroll mergers and refinance debt. Investors are given little insight into how the loans to private companies are structured.
“Borrowers with less than stellar credit have been able to borrow galactic amounts of debt at down-to-earth rates,†a panel from Carter Ledyward and Milburn said at a meeting of the Loan Syndications and Trading Association.
At the leveraged loan industry’s annual conference on Oct. 17, nearly one in four participants voted to label cov-lite loans “the devil incarnate.†A senior banker who sells leveraged loans said cov-lite loans were “more like purgatory, because you can watch your company degrade but not trip any covenants that allow you to call a default.†Some 61 percent, the largest group of participants, said they “don’t love them, but can live with them.â€
A look back on our reporting of the past week’s highs and lows in finance.
WEDNESDAY, NOV. 27
HedTK | DealBook »
TUESDAY, NOV. 26
Once Suitor, Jos. A. Bank Is a Target | In a strategy that harks back to the Pac-Man defense, Men’s Wearhouse bid $55 a share in cash to acquire its one-time suitor. DealBook »
New Boom in Subprime Lending | Wall Street and private equity firms, hedge funds and other opaque financing pools have grown frustrated by low returns on other forms of debt and turned instead to riskier but more lucrative bets on ever-smaller companies. DealBook »
Analyst Seeks to Avoid Jail by Testifying in SAC Trial | The trial of Michael Steinberg has lost a bit of its tension because it comes after SAC’s guilty plea and the firm’s agreement to stop managing money for outside investors. DealBook »
Deal Professor: Risky Investment Vehicle With High Yields Gains Prominence | Business development companies are publicly traded and return big dividends, making them attractive to small investors. But they also come with high risk, writes Steven M. Davidoff. DealBook »
MONDAY, NOV. 25
Debate Over Activists’ Paying of Board Nominees | Companies say that it is not clear who the activist director is really working for â€" its shareholders or the hedge fund. DealBook »
DealBook Column: Render Unto Caesar, But Who Backs Bitcoin? | Bitcoin aspires to be a universal electronic currency. On that score, it is unlikely to succeed, writes Andrew Ross Sorkin. DealBook »
Chrysler’s Stock Sale Is Delayed Until 2014 | Its parent company, Fiat, will have more time to negotiate the purchase of a 41.5 percent stake held by a union health care trust. DealBook »
Lending Practices at R.B.S. Condemned in Two Reports | The British bank principally owned by the government said that it had hired a law firm to examine its lending practices. DealBook »
Client Conflicts Undermine Planned Merger of 2 Law Firms | Orrick, Herrington & Sutcliffe and Pillsbury Winthrop Shaw Pittman were in advanced merger talks that would have created one of the country’s 10 largest firms. DealBook »
SUNDAY, NOV. 24
In Bitcoin’s Orbit | There are dozens of digital alternatives, like PeerCoin, Litecoin and anoncoin, whose backers point to advantages they say their currency has over bitcoin. DealBook »
Once Cable’s King, Malone Aims to Regain His Crown | John Malone, Liberty Media’s chairman, is looking to shake up the cable industry, which has been losing pay-TV subscribers. DealBook »
WEEK IN VERSE
Devil Inside | INXS provides a theme song for the resurgence in subprime loans. DealBook »
Thanksgiving Song | Adam Sandler celebrates the holiday. DealBook »
Chanukah Song | Adam Sandler celebrates the other holiday. DealBook »
