Once relatively rare, covenant-lite has become the norm in the U.S. and European bond markets thanks to sustained investor demand in the asset class. Although widely accepted, important questions remain on cov-lite. Key of them: How are these loans going to get away with it when the long-term default cycle finally turns around and credit defaults start to rise? Historically, default collections on Cov-lite loans have been on an equal footing with those of traditionally touted loans, although there is a consensus that recent bonds will recover slightly less than their predecessors, as a larger share of low-value issues, combined with other types of credit, is cov-lite. As with a single TRS name, an investor earns money by supporting between line costs and asset allocation. Any price increase also boosts yields. Of course, the losses incurred by the investor would be compounded by the leverage of the vehicle if the credit lost value. Even if the value of the guarantee falls below a predetermined level, the investor could face a margin call or, in the worst case, the TRS could be liquidated. Defaults are more serious. As the name suggests, this type of standard occurs when a company misses either an interest or principal payment. There is often a pre-defined period, for example. B 30 days, during which a transmitter can harden a standard (the «healing time»).
Subsequently, lenders can either present a leniency agreement that gives the issuer some air, or take appropriate action, including accelerating or se referral of the loan. Rich/cheapThy terminology is imported from the debt market into the credit market. If you qualify a credit as rich, it means that it acts at a small spread compared to other credits rated similarly in the same sector. Conversely, referring to something cheap means that it acts with a high spread compared to its peer group. That is, you can buy it on the cheap. In most cases, the risk of default is most clearly expressed by a public rating from Standard and Poor`s Ratings Services or another rating agency. These ratings range from «AAA» for the most creditworthy loans to «CCC» for the most modest.