Have been following this area for some time.
In recent years, high yield (
junk) debt has experienced a new golden age. There are many valid reasons for that but not all of them can be projected into the future. Overall risk spreads have gone down and the volatility of the spread changes has also gone down. A Great Moderation version.
Covenant-lite loans, a gradually larger subset, have grown and have become lighter.
Markets are more efficient or opportunity?
Anybody here with "sentiment" concerning CLO vehicle exposure to those assets?
My take is that covenant-lite debt may find itself in a delicate posture given a less benign environment as "corrective" measures imposed by the lender may come too late. That may trigger higher default rates and lower recoveries in comparison to historical measures.
Here's a recent report that describes well and objectively the issue.
http://insolvencyintel.abi.org/abi-journal/covenant-lite-leveraged-loans-time-tested-or-time-bombThere exist two potential opportunities:
-stay away from issuers who may hurt if credit conditions change
-find market-based or OTC tools that may benefit from a more toxic environment