Author Topic: Covenant-lite leverage loans  (Read 596 times)

Cigarbutt

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Covenant-lite leverage loans
« on: December 06, 2017, 10:22:12 AM »
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-bomb

There 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
« Last Edit: December 06, 2017, 10:24:23 AM by Cigarbutt »


Cameron

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Re: Covenant-lite leverage loans
« Reply #1 on: December 06, 2017, 05:17:04 PM »
CLO's with cov-lite loans have some pretty good equity cushion that I have seen. Have seen some ridiculous deals though. Almost seems like a shortage of loans and managers of CLO's want to partake in more deals. CRE CLO's are becoming a thing.
« Last Edit: December 06, 2017, 05:27:39 PM by Cameron »

Cameron

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Re: Covenant-lite leverage loans
« Reply #2 on: December 06, 2017, 05:26:01 PM »
Here's a recent CRE issuance its eh... interesting.

https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1093463

Cigarbutt

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Re: Covenant-lite leverage loans
« Reply #3 on: December 06, 2017, 06:10:21 PM »
I understand that most sectors of CRE have rebounded nicely since 2009 especially apartments but also office and industrial.

https://www.greenstreetadvisors.com/insights/CPPI

Even if retail and malls seem to be hard hit, some suggest that warehousing may compensate in our new world. ::)

I plan to eventually invest directly in apartment real estate. Need to do more work.

The Moody report you provided is interesting. I don't have the required sophistication, but the properties seem to be sub-par in terms of occupancy and leverage. The CLO appears to be based on a relatively senior position. Where's the equity tranche or am I missing something? Also, I find that the spread is not worth the risk but everything seems to be relative these days.

Could you provide more color?

« Last Edit: December 06, 2017, 06:48:33 PM by Cigarbutt »

Cameron

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Re: Covenant-lite leverage loans
« Reply #4 on: December 06, 2017, 07:35:50 PM »
I understand that most sectors of CRE have rebounded nicely since 2009 especially apartments but also office and industrial.

https://www.greenstreetadvisors.com/insights/CPPI

Even if retail and malls seem to be hard hit, some suggest that warehousing may compensate in our new world. ::)

I plan to eventually invest directly in apartment real estate. Need to do more work.

The Moody report you provided is interesting. I don't have the required sophistication, but the properties seem to be sub-par in terms of occupancy and leverage. The CLO appears to be based on a relatively senior position. Where's the equity tranche or am I missing something? Also, I find that the spread is not worth the risk but everything seems to be relative these days.

Could you provide more color?

The equity tranche doesn't have a coupon they get what is left after all the other tranches are paid, pretty valuable with how rates are today.

Spread is worth the risk if your making 800bps plus libor I guess, the thing is I couldn't tell you what the risk is.

They are actively managed. Its sort of like a CDO but not if that makes sense? CDO's have securitized assets as collateral CLOs have unsecuritized , bankruptcies didn't spike after the housing crisis so its really the only part of that market thats alive and breathing though CDO's have made a little comeback.

I'm just waiting for the synthetic filled with derivatives short volatility.
« Last Edit: December 06, 2017, 07:43:03 PM by Cameron »

Cameron

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Re: Covenant-lite leverage loans
« Reply #5 on: December 06, 2017, 07:39:52 PM »
Just wanted to add, these aren't all risky just the one I gave is a little weird, as long as they are diversified over many industries and not just in energy and mining like some were in 2015.

Something like 30 out of 6000 clo tranches have been wiped out or defaulted, I can't remember.

« Last Edit: December 06, 2017, 07:42:42 PM by Cameron »