Financial institutions are issuing covenant-lite loans at a record pace, creating worry about a lending bubble among some experts.
Covenants are financial restrictions placed on companies that borrow to give lenders assurance that they will receive their money back. Covenant-lite (cov-lite) loans carry fewer of these restrictions.
U.S. cov-lite loan issuance recently totaled $83.6 billion for the year-to-date, up 41 percent from $59.4 billion in the same period of 2013, according to Dealogic,
CNBC reports.
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Financial institutions have issued 82 cov-lite loans so far this year, up from 68 during the same period in 2013. Both measures of issuance are at record levels this year.
Marc Rowan, co-founder of private equity titan Apollo Global Management, is one of those who is concerned about the trend.
"Covenants have been stripped away, cov-lite is the norm, senior debt levels are actually higher than they were in 2007," he said at an investment conference last month, according to CNBC.
"I do see many signs of the bubble of the future — the default specter that you're talking about. I agree that short-term we're not likely to see that, but all the danger signs are there of a future crisis."
However, not everyone sees the increase in cov-lite loans as a bad sign.
"Cov-lite does not mean 'no covenants' nor does it necessarily indicate reckless lending practices," Robert Kinsey, a portfolio manager at OppenheimerFunds, noted in a May report, according to CNBC.
"We see the increase of cov-lite loans and the loosening of restrictions as yet another measure of increased investor risk appetite — less fear of uncertainty — and stable to improving credit fundamentals of borrowers."
Experts are concerned that the high-yield bond market has gotten frothy too, though few think it's in bubble territory yet.
"I would say high-yield bonds are overvalued relative to stocks and to history in terms of [yield] spreads over Treasurys," Tim Ghriskey, chief investment officer at Solaris Asset Management, told Moneynews. "But a bubble, I wouldn't go that far."
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