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Does the return of so called “Cov lite” lending signal a new financial crisis is not far away?

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The Financial Times recently reported that Europe is mimicking America once again with a move to ‘covenant lite’ lending. The FT says that 45% of institutional lending across the market this year fell into this category.
I remember reading about ‘cov lite’ loans for the first time just a year or so before the run on Northern Rock, in September 2007, which was one of the early signs of the impending financial crisis. However, cov-lite loans only accounted for around 7% of the market at their height in 2007 before disappearing completely as the full effects of the financial crisis hit.

Their reappearance now shows that cheap money is once again in plentiful supply and that lenders are competing with each other to offer the best terms to what they perceive to be ‘prime’ borrowers. Can a new financial crisis be far away? Hopefully the central banks will be more vigilant this time and with higher capital ratios in place for banks across the world there should be more of a cushion if things do take a turn for the worse. However, the next stage on from ‘cov lite’ lending last time was sub-prime lending and I for one will be keeping an eye out for any sign of that.

William Harris – Director

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