The devil's in the detail for junk debt investors facing coronavirus defaults

LONDON - Before the coronavirus, investors hungry for returns piled into risky corporate loans and bonds with precious little protection for creditors. Now they’re frantically scouring the terms to see just what firms can get away with to survive the fallout.

“The number of questions have just skyrocketed since March 1. People are just poring over the documents,” said Charles Tricomi, head of leveraged loan research at Xtract Research in New York, which analyses debt covenants for investors. Covenants on European high-yield bonds have also became more than twice as permissive over the past decade, according to financial intelligence provider Reorg.

Michael Dakin, a partner at Clifford Chance, said it was like driving your car with the warning indicators for the oil, gas and engine all switched off. Many deals now allow firms to add one-off costs or projected earnings increases to their current earnings to make them appear healthier financially, potentially even staving off default.

Another focus point for investors is debt capacity. While junk borrowers have typically drawn down credit lines first to raise liquidity, loose covenants also allow them to raise debt that pushes existing lenders further down the repayment queue. “If your alternative is for the company to go into liquidation, maybe you don’t mind being subordinated,” said David Newman, chief investment officer of global high-yield at Allianz Global Investors.The risk for creditors is that if a company fails to survive the pandemic despite raising more cash, they’ll be further down the pecking order when it comes to trying to salvage anything.

Great Depression 2: Lender Boogaloo

yorukbahceli Are coronavirus defaults the same as Ye Ole Credit default swaps

'Herd Immunity' = young healthy people needlessly contract an unknown virus, that may reactivate at a later date in terrible ways like HIV does, by going back to work for 12.00/hr, so that Boomers can make a slightly higher return on their portfolios.

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