Comments on: Don’t worry about cov-lite loans http://blogs.reuters.com/felix-salmon/2013/05/31/dont-worry-about-cov-lite-loans/ A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 http://wordpress.org/?v=4.2.5 By: Brendan Hashbarger http://blogs.reuters.com/felix-salmon/2013/05/31/dont-worry-about-cov-lite-loans/comment-page-1/#comment-54530 Fri, 10 Oct 2014 02:58:34 +0000 http://blogs.reuters.com/felix-salmon/?p=21906#comment-54530 As well as in this little existing tablet, Brevicon 1/35 for more than each year. I started my best past frequent period at The spring of 4, 2010, in the future very early just as my best 21 years of age time lively medicine stop over the Wednesday and i also begun blood loss over the Wednesday. My very own period of time has been regular. Following Chintan Shivir, any Jaipur commitment of any bash said, “the Indian State Institutions the first will always put together the capability of girls Personal growth Communities (SHGs). Indira Gandhi possessed started NABARD 30 years ago to help you induce farming along with country improvement. “The Institutions the first thinks that the next step is to ascertain a fanatical State Bank or investment company for women to deliver economical products and services to help you most women generally and women SHGs for example.Ins PTI AMR RAI.

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By: realist50 http://blogs.reuters.com/felix-salmon/2013/05/31/dont-worry-about-cov-lite-loans/comment-page-1/#comment-47167 Sun, 02 Jun 2013 05:41:34 +0000 http://blogs.reuters.com/felix-salmon/?p=21906#comment-47167 I will second casualsophist. I’ll also add that it’s fair to assume that cov lite loans as a group are to higher quality borrowers that historically have fewer total wipeouts for lenders – larger borrowers, for example. Also, the answer to a covenant default in many cases is that the bank group gets an amendment fee or a higher interest rate – so better economics. Felix’s knowledge of this particular area seems pretty superficial.

What does seem fair to point out is that cov lite loans do have some covenants – they’re just “lite” covenants but are broadly equivalent to covenants on high yield (junk) bomds and probably stricter than covenants on investment grade bonds. While it is a sign of a more borrower friendly market, there’s no magical reason that a BB rated loan has to have dramatically more onerous covenants than BBB senior unsecured bonds.

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By: DavidMerkel http://blogs.reuters.com/felix-salmon/2013/05/31/dont-worry-about-cov-lite-loans/comment-page-1/#comment-47160 Sat, 01 Jun 2013 15:02:43 +0000 http://blogs.reuters.com/felix-salmon/?p=21906#comment-47160 Ask a loanholder, “All other things equal, would you rather have a cov-lite loan or a normal one?” The answer will always be “Normal, of course. Why are you asking such a dumb question?”

Loanholders would prefer more defaults with lesser severity than fewer with higher severity. What is flexibility to the borrower is a higher degree of expected credit costs to the lenders.

To make this general, I have to explain to you the four phases of competition in uncertain outcomes. I know I’ve written about this before, but I casn’t remember where. It applies to a wide number of phenomena, including insurance underwriting and fixed income investing.

Phase 1: the market is offering a bargain in yields relative to normal default costs, and terms & conditions are firm. More competition causes prices to rise & yields to fall.

Phase 2: the market is fully priced in yields relative to normal default costs, and terms & conditions are firm. More competition causes terms & conditions to erode. Conservative firms end new purchases. Assets with good terms get premium pricing.

Phase 3: the market is fully priced in yields relative to normal default costs, and terms & conditions are soggy. More competition causes some to speculate that “maybe things won’t be so bad, besides, we have money to put to work.” Conservative firms sell existing positions.

Phase 4: Market crashes, defaults are realized. Lower quality assets lose more money. Conservative firms buy assets at a discount from posers who thought they knew what they were doing, some of which are now broke.

So, no Felix, the presence of cov-lite loans indicates that we are in phase 2 at minimum. I think we are in phase 3. I have sold my loan funds for clients last year — we are on borrowed time now.

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By: absinthe http://blogs.reuters.com/felix-salmon/2013/05/31/dont-worry-about-cov-lite-loans/comment-page-1/#comment-47153 Fri, 31 May 2013 17:51:00 +0000 http://blogs.reuters.com/felix-salmon/?p=21906#comment-47153 Dunno, using this data to infer causal conclusions sounds pretty dodgy. I’d trust it more if there were a natural experiment somewhere that you could use. Otherwise the causal story (if there is one) probably arises from adverse selection or other biases.

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By: CasualSophist http://blogs.reuters.com/felix-salmon/2013/05/31/dont-worry-about-cov-lite-loans/comment-page-1/#comment-47152 Fri, 31 May 2013 17:46:06 +0000 http://blogs.reuters.com/felix-salmon/?p=21906#comment-47152 Felix- the right comparison is not cov-lite recovery vs. unsecured bond recovery (of course it’s better!), but rather cov-lite recovery vs. covenant recovery… and there the story is exactly as you’d expect: cov-lite companies, when they file, are in worse shape and recoveries are worse.

Now, that’s a different question than whether or not they make sense (sometimes!) or whether we’re in a bubble (maybe!) but it’s a fact nonetheless and I think you badly misrepresent the case here.

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By: TomLindmark http://blogs.reuters.com/felix-salmon/2013/05/31/dont-worry-about-cov-lite-loans/comment-page-1/#comment-47151 Fri, 31 May 2013 17:24:51 +0000 http://blogs.reuters.com/felix-salmon/?p=21906#comment-47151 A lot of this makes sense, particularly the discussion of more resilient liability structures. I would agree that cov-lite makes sense for highly rated borrowers, and banks made such loans to AAA and AA rated companies for decades. As the articles you cite point out the problem isn’t cov-lite per se rather the use of that structure for riskier credits. Unfortunately the data you present in support of cov-lite loans doesn’t segregate the outcomes by credit class so it’s of limited use in assessing the relative soundness of those loans.

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