No Strings Attached

“Your admirers on the street
Gotta hoot and stamp their feet
In the heat from your physique
As you twinkle by in moccasin sneakers

And I thought my heart would break
When you doubled up at the stake
With your fingers all a-shake
You could never tell a winner from a snake
but you always make money

Easy money

With your figure and your face
Strutting out at every race
Throw a glass around the place
Show the colour of your crimson suspenders

We would take the money home
Sit around the family throne
My old dog could chew his bone
For two weeks we could appease the Almighty

Easy money

Got no truck with the la-di-da
Keep my bread in an old fruit jar
Drive you out in a motor-car
Getting fat on your lucky star just making

Easy money”

The song that has it all, from a youthful Professor Fripp. It may need an additional verse, something about “forgetfulness” perhaps. According to press reports, the usual suspects are at it again:

“Bank lending to companies with few restrictions has surged back since the financial crisis virtually killed the practice.

The record issuance of so-called covenant-lite loans raises questions over whether a fresh wave of debt defaults and losses will return—probably not in the short term, according to experts, but becoming more likely as the trend plays itself out in coming years.

U.S. "cov-lite" loan volume recently hit $83.6 billion over 82 deals in 2014, up 41 percent from the same period in 2013 ($59.4 billion over 68 deals), according to data tracker Dealogic. That represents the highest year-to-date volume and deal activity on record.

Credit Suisse leads the U.S. for such loans with a 12.8 percent market share in 2014, according to Dealogic.

The Swiss bank is followed by Citigroup and Deutsche Bank with 11.5 percent and 10.8 percent of loans, respectively.

What could possibly go wrong, we ask you? As is well known, better stewards of capital have never graced the earth! Occasionally they might need a little bailout, but hey, we're all friends here, we don't need no covenants. Besides, as everybody knows, the future is so bright, you cannot look at it without first donning ray-bans!

Life is fun again! Thank you Bernayellkencarndraghey! We couldn't have done it without yous!

Sloshed as We Are …

Almost all experts agree of course that there is little to worry about, except for a handful of curmudgeons who see bubbles everywhere. Besides, it is all perfectly normal, and nothing bad can happen for the simply reason that there is still enough green out there in the Land of Cockaigne:

“The surge in cov-lite doesn't surprise observers.

"When you get this far into the business cycle, this is what happens. It's as simple as that. History doesn't repeat itself, but it rhymes," said Jack Flaherty, an investment director for $129 billion GAM's fixed income investment team.

Flaherty said he doesn't have an allocation to cov-lite loans but also isn't worried about a blow-up in the near future. "I don't think there's any reason to say this is going to fall apart soon," he said. "There's still too much money sloshing around."

“What happened?” someone will ask one day. “Sloshed as we were your honor, we thought it would be a good time to party on. Hic!”.

We find it slightly bewildering that no-one has stopped to ask why there actually is a business cycle, one which seems to have gone quite 'far', or at least this far. Did it drop from the sky unbidden? Is it just a happy accident? Or could be all that dosh sloshing about:

The sloshing of the dosh, courtesy of the bold bureaucrats manning the printing press – click to enlarge.

Admittedly, we have to concede that at least one of the arguments forwarded from the nothing to worry about faction does make sense: it is better to have a good loan without covenants than a bad one with covenants that get broken anyway.

There is just one teensy problem with that line of thought: before they go bad, most loans actually look good. Often until very shortly before, even. All we know for sure is that the combination “surfeit of free money from the central bank” plus “lots of financial innovation” has a nasty habit of not working out as intended.

Only in the long run of course, when we are all dead anyway. In the meantime:

Chin-chin!

Charts by: Dealogic, St. Louis Fed