|LYNNLEY BROWNING, Eduardo Porter, whose Economic Scene column normally appears on this page, is away.|
A small, little-known company from
But investors clamor to buy pieces of the loans, one of which pays annual interest of at least 8.75 percent. Demand is so strong, some buyers have to settle for less than they wanted.
A scene from the years leading up to the financial crisis in 2008? No, last month.
The company involved was
''Weaker credit is traveling down to smaller companies that ordinarily would not have this kind of leverage,'' said
The loans to the privately held
Leveraged loans became popular before the 2008 collapse but nearly disappeared afterward, regarded as a symbol of unbridled lending. But they started to return in 2010 and are now back in force, with volumes of
The type of leveraged loans that
Dell said in September that it would use a
Regulators, finance lawyers and even the ratings agencies have also grown increasingly uneasy about the return to credit risk. In March, the Federal Reserve, the
In May, Moody's wrote that signs of a ''covenant bubble'' were emerging. (
The lending boom underscores a sea change in financing practices since 2008. In the face of regulatory restrictions put in place since then, banks are ceding much of their precrisis role in bankrolling and owning leveraged loans. That role has been taken up by private equity firms and investment funds, which slice up the loans and then pool them for sale to other investors. Those shadow banking players, which are typically more aggressive than banks, now make up 60 percent of new cov-lite loans, according to the
Companies use leveraged loans primarily to bankroll acquisitions of other companies, to enter into private equity deals or to refinance debt. Documents for loans to private companies are generally not publicly disclosed, giving investors little insight on how they are structured.
Unlike leveraged loans with covenants, or protections, cov-lite loans contain few or no pledges by a company to keep its debt below certain levels or even to report quarterly financial results in a timely fashion. But investors like these loans because, unlike bonds, their payouts ''float'' in tandem with the global benchmark interest rate in
''You are relying on the cash flows of the company, so if earnings go down, you don't have the cash flow and may not see a dime,'' said
The loans have their advocates. Companies that issued cov-lite loans from 2005 to 2007, the height of the credit bubble, defaulted at a rate of 7.8 percent compared to a rate of 10.45 percent for companies that issued loans of all types, including those with tripwires, according to Moody's. Loans that came due in 2009, a year after the financial crisis, fared well, as did other types of loans, because of the infusion of cash from the nation's central bank.
''When you examine underlying factors, such as historical default and recovery data, you'll find that covenant-lite loans actually may be a better bank loan investment than many loans containing covenants,''
But at the leveraged loan industry's annual conference on
This is a more complete version of the story than the one that appeared in print.
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