Moody’s is calling on investors to destroy the guidelines against borrowers within the U.S. leveraged loan market as covenant protections remain stubbornly lacking.
The ratings agency said covenant packages have remained within the “weak” category since 2013, and only modest improvement is predicted in 2016.
It cited investor protections for instance asset sales without lender approval and excessive cushions in leverage ratios, yet others, that regulators also provide acknowledged as inadequate.
“Which means that investors in today’s volatile market are increasingly being put through rising risk simply because they forfeit key levers traditionally available whenever a borrower reaches bankruptcy,” Moody’s said.
It also noted credit covenant quality scores haven’t improved meaningfully since regulators published their leveraged lending guidance within the first 1 / 2 of 2013.
The low default, a low interest rate rate environment has driven yield-hungry investors towards the leveraged loan market. This enables the crooks to take full advantage of being relatively at any height across the capital structure, but often comes in the expensive of poor covenant protections.
Moody’s believes a renewed focus by investors, together with more regulatory concentrate on covenant weak spots, could set happens for dramatic changes.
“Our data signifies that to make sure that covenant quality to significantly improve, investors must break the guidelines and demand better protections,” it said.
