15 Jul 2019
Food fights at the Fed and in the Leveraged Loan marketContributor Michael Cembalest
Eye on the Market
The food fight between the President and the Fed Chair rhyme with what happened in the 1970’s between Nixon and Arthur Burns. Rather than an inflationary hangover, too much easing risks expanding global valuations beyond sustainable levels. There’s another food fight worth watching: the one between leveraged loan issuers and buyers. Over the last few years, issuers have been winning this fight hands down. The broad erosion of loan covenants and the use of “cash flow add-backs” has reached unprecedented levels, arguing for materially lower loan recovery rights when the next recession one day arrives. A special Eye on the Market section takes a deep dive into the broad-based surrender of loan investors to issuers and their counsel.