Alas, investors have the hots for this debt, and companies are taking advantage of it by weakening covenants, giving investors fewer protections and the company more leeway – such as paying interest with more debt rather than cash if it runs out of cash (payment-in-kind or PIK); normally, not being able to pay interest would constitute a default, but not with these “covenant lite” or “cov-lite” loans. The boom in cov-lite has started years ago and has surged to massive record proportions. When these loans default, investors are exposed to much greater losses.
As of the end of May, a record 77.4% of the $1 trillion in leveraged loans currently outstanding are cov-lite, the 13th month in a row of records, up from 55% in June 2014:
