Institutions in search of yield are gobbling up loans with little protection, at riskier and riskier spreads.

Record-breaking chart from LeveragedLoan.Com.

  • The share of outstanding leveraged loans that are covenant-lite crept to another record high in February, reaching 75.8%, according to LCD and the S&P/LSTA Loan Index.
  • At the end of February, the amount of U.S. leveraged loans outstanding was $984 billion, meaning there is now $745 billion of covenant-lite loan debt held by institutional investors.
  • The share of outstanding cov-lite loans matches the rate that newly-issued loans are cov-lite, according to LCD. Of the nearly $92 billion of U.S. leveraged term debt issued so far this year, $69 billion is cov-lite, according to LCD.
  • More Risk, Less Return

    Also consider More Risk, Less Return: Spread vs Leverage on US LBO Loans.

  • First-lien leverage on loans backing U.S. LBOs has crept to a record-high in 2018 as yield-starved institutional investors flock to these deals, looking to put huge cash stores accumulated over the past 18 months to work.
  • Those yields aren’t what they used to be, however. Indeed, by one metric, LBO loans are less attractive for an investor now than at any time since the financial crisis.
  • Specifically, LBO loans this year offer institutional investors 75.1 bps of spread per unit of leverage (SPL). That’s down noticeably from 87.5 bps last year and 111.5 bps in 2016, according to LCD.
  • Recklessness prevails, still.

    Institutions buying junk bonds and other such garbage are about to get clobbered.

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