Dealmaking Competition Erodes Junk Loans’ Last Line of Defense

Moody’s warns that lenders are relaxing covenant requirements to win deal mandates, eroding the last line of defense for sub-investment grade loan investors. The shift toward covenant-lite issuance increases default and recovery risk for leveraged loans and could force investors to demand wider spreads or tighten underwriting to protect returns.

Analysis

Moody’s warns that lenders are relaxing covenant requirements to win deal mandates, eroding the last line of defense for sub-investment grade loan investors. The shift toward covenant-lite issuance increases default and recovery risk for leveraged loans and could force investors to demand wider spreads or tighten underwriting to protect returns.