Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Citigroup Inc (C), Goldman Sachs Group, Inc. (GS): Are “Cov-Lite” Loans Bad for Investors’ Financial Health?

This may sound counterintuitive, but as Salmon shows using Moody’s own data, both default rates and recovery rates are quite stellar for these loans — with banks being able to recover nearly 90% of value from those loans that did default. This, Salmon asserts, is because of subordination of the debt, which protects the cov-lite loan against severe losses.

Are they safe?
All the foregoing seems to make arguing about safety akin to picking nits, but at least some commenters are sounding the alarm about the escalating issuance of these kinds of leveraged loans. At the recent Milken Institute Global Conference, The CEO of Apollo Group Inc (NASDAQ:APOL) noted that investors should remember how, during the financial crisis, a good number of these loans went belly-up.

Also, while the debt of healthy companies is less onerous, those on shakier ground will obviously carry more risk. Citigroup Inc (NYSE:C) has been active in originating collateralized debt obligations backed by subprime auto loans, and Goldman Sachs Group, Inc. (NYSE:GS) has been selling the debt of companies with ratings of CCC — or lower. Many of these loans were covenant lite, and according to analysts at Morgan Stanley (NYSE:MS) — also a player in the CLO market — sales of these instruments have been brisk.

While the low default rate on these loans is encouraging, it is notable that Fitch Ratings recently commented on the growth of this market and the fact that the caution of the post-crisis era appears to be diminishing. Importantly, Fitch pointed out that at the same time as profits are flagging, corporate debt is rising. That last part alone sounds like a warning bell to me.

The article Are “Cov-Lite” Loans Bad for Investors’ Financial Health? originally appeared on

Fool contributor Amanda Alix has no position in any stocks mentioned. The Motley Fool recommends Goldman Sachs. The Motley Fool owns shares of Citigroup.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.