Jan 27, 2020 - Economy
Covenant loan quality continued to weaken in 2019
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The quality of North American leveraged loan covenants rose back near its weakest level on record in the third quarter of 2019, according to ratings agency Moody's.
What it means: Moody's Loan Covenant Quality Indicator (LCQI) "tracks the degree of overall investor protection in the covenant packages of individual speculative-grade leveraged loans issued in the US and Canada," the company says.
- Loan covenant quality is measured on a five-point scale, with 1 meaning the strongest investor protections and 5 meaning the weakest.
The intrigue: "The weakening protection is all the more striking because it continued even as volumes declined and spreads widened from Q2 to Q3," Moody's senior covenant officer Derek Gluckman said in a statement.
- "Normally, covenant protections would improve in such market conditions. But the findings suggest that risks are increasing and that while investors are voicing caution, they are not effectively pushing back on permissive covenant terms."
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