To quote my tennis idol John McEnroe “You cannot be serious!!”
Some of the most controversial financing practices of the credit-bubble years – from cov lite loans to Pik toggle notes and dividend recap exercises – have returned to Wall Street, stoking fears that debt markets are growing overheated.
The techniques fell into disrepute during the financial crisis because they were based to varying degrees on the same rosy expectations that encouraged companies and consumers to assume what proved to be crippling levels of debt.
Really? We’re back to these kinds of underwriting practices?
In a cov light – short for covenant light – loan, borrowers are granted credit with few, if any, conditions.
Pik toggle transactions make it possible for debt to be repaid with more debt – payment-in-kind notes. In a dividend recap, companies take on additional debt to pay dividends to their owners.
Wonderful. Let’s save drowning victims by forcing their heads under water…
The problem with these loans is simple: cov-lite deals have little or no ratio tests written into the loan agreements for you to monitor the borrower’s performance and PIK-toggles offer interest payments in the form of more debt so you dilute the value of the outstanding debt in the process.
Proof-positive we’ve learned absolutely nothing…
And the Master of the Obvious award of the day goes to the Fed:
In the minutes of its November meeting, the Federal Open Market Committee noted “the possibility that some negative side effects might result from the maintenance of very low short-term interest rates including the possibility of excessive risk-taking”.
Great, thanks for playing…