econintersect.com
       
  

FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.



posted on 15 October 2016

These 2 Debt Instruments Pose Peril To Millions Of Investors

from Elliott Wave International

In a world of low and even negative rates, bond investors are so hungry for yield they are willing to accept high levels of risk. For example, bond investors are increasingly embracing debt instruments known as covenant lite loans, which provide minimal protection should the issuer get into financial trouble.

Stay informed. Stay prepared. See what we see ahead for U.S. markets -- now, via this risk-free offer to the Financial Forecast Service.

*********

Investors should pay close attention to this development, because this is exactly what happened before the 2007-2009 financial crisis.

Our April 2007 Elliott Wave Financial Forecast warned subscribers beforehand:

The only reason that the crisis has yet to spread to the corporate debt market in general is that lenders continue to slacken underwriting standards, just as they previously did in the mortgage sector. Consider, for instance, the latest boom instrument, a corporate product known as "covenant lite," bank loans that "subject borrowers to few of the usual performance requirements that have been standard in the past." Standard & Poor's says that $41 billion in lite loans have already been issued in 2007, a figure that is greater than that of the last 10 years combined.

Remember, cov-lite loans free the debt issuer from meeting normal fiscal disclosures and financial metrics, so the risk to lenders is high.

With that in mind, consider this (Bloomberg, Sept. 27):

Just 35 percent of new leveraged loans issued in 2016's first half had traditional covenants that require regular financial check-ups, compared with 100 percent in 2010.

A billionaire investor noted that "the fact that there are no covenants tells you that people are substituting yield for credit judgment."

But financial optimism is also reflected in the popularity of yet another high-risk debt instrument.

Here's a chart and commentary from our October Financial Forecast:

Another bond market revisitation from the last credit mania is the "red-hot" market for payment-in-kind (PIK) bonds. ... PIK bonds allow the issuer to pay interest in additional debt rather than cash. September is set to become the busiest month ever for PIK issuance, led by German auto component maker Schaeffler AG's $1.5 billion issue, the largest in history. Similar to the heightened risk associated with buying cov-lite loans, seasoned investors acknowledge the peril of buying PIK bonds.

As we've noted before, credit implosions develop when lenders relax credit standards and investors reach for yield.

This might well be the time to play it safe.


Unleash the power of the Wave Principle

Much like a great sports play; to appreciate a great market forecast, you have to see it. In fact, we'd like to show you four. Our examples do indeed show what can happen when Elliott analysis meets opportunity. But we're not asking you to attend a class in 'good calls.' In each of these four markets, the unfolding trends have (once again) reached critical junctures. You really, really want to see what we see, right now.

Get your report -- How to Find Real Opportunities in the Markets You Trade -- FREE

This article was syndicated by Elliott Wave International and was originally published under the headline These 2 Debt Instruments Pose Peril to Millions of Investors.

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical News Post Listing










Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, using Livefyre just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.



You can also comment using Facebook directly using he comment block below.





Econintersect Contributors


search_box

Print this page or create a PDF file of this page
Print Friendly and PDF


The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.


Take a look at what is going on inside of Econintersect.com
Main Home
Analysis Blog
A New Era of Central Banking?
Is Free Trade Harming the Economy?
News Blog
01 February 2017 FOMC Meeting Minutes: Little Seems to Have Changed Since the Previous Meeting
An Inside Look At Doomsday Bunker Homes With A Price Tag Of 2 Million
January 2017 Headline Existing Home Sales Surprisingly Good
China Moves To Put North Korea In Its Place
Trucking Data Improves In January 2017
February 2017 Chemical Activity Barometer Has Strong Gain
Infographic Of The Day: 2017's Top New Year's Resolutions
Early Headlines: Asia Stocks And Dollar Up, Oil And Gold Steady, Nat Gas Plunges, Fed's Williams Says Low Rates Will Last, Steep UK Brexit Bill, Greek Poverty, China Stocks Look Up? And More
Climate of the Southwest
Did the Romans Create both Christianity and Islam?
The Psychology Behind Trump's Awkward Handshake ... And How To Beat Him At His Own Game
Most Lawsuits Against Trump Related To Travel Ban
Average Gasoline Prices for Week Ending 20 February 2017 Statistically Unchanged
Investing Blog
The Real 401k Plan Manager 20 February 2017
Investing.com Technical Summary 21 February 2017
Opinion Blog
The Blame Game
Fascism Defined And Described By Oswald Mosley
Precious Metals Blog
Deflation And Gold: A Contrarian View
Live Markets
22Feb2017 Market Update: DOW Rises To New High, Are Investors Betting That Nothing Will Go Wrong In Next Few Months, Crude Prices Slip Further, Investors Are Way Too Optimistic
Amazon Books & More






.... and keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government





























 navigate econintersect.com

Blogs

Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day
Weather

Newspapers

Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government
     

RSS Feeds / Social Media

Combined Econintersect Feed
Google+
Facebook
Twitter
Digg

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution

Contact

About

  Top Economics Site

Investing.com Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2017 Econintersect LLC - all rights reserved