Today's High Yield Bond and Leveraged Loan Markets
Figure 1. Liability Management Transactions or LMEs (referred to as distressed exchanges) are 3x more likely than defaults. Thus, the traditional definition of a "default" is hiding a massive amount of credit risk.
Documentation Loopholes Remain in Many Outstanding Loans
Figure 2. Covenant loopholes are common, not rare edge cases. Source: Covenant Review, Barclays Research, as of August 2024.
Average Recoveries are Declining
Figure 3. High yield bond recoveries have declined recently, as many companies undergoing an LME still default in the short to medium term. Source: J.P. Morgan.
Why do investors need advanced covenant analytics?
Basic covenant review is no longer sufficient. LME risk lives in technical interactions across baskets, voting thresholds, subsidiary definitions, collateral transfer rights, and MFN language. CREDX AI's Covenant Intelligence Platform allows investors to:
- Identify specific LME pathways, not just “loose” documentation (e.g., uptier, drop-down, double-dip feasibility).
- Quantify downside risk, including how much priming debt can be issued and how much collateral can be moved away.
- Compare credits on a documentation-adjusted basis, avoiding situations where spread fails to compensate for hidden subordination risk.
- Improve timing and positioning, enabling earlier exits or coordinated defenses before value is transferred.
For medium to small investors, advanced covenant analytics are not about gaining upside—they are about avoiding asymmetric losses. In a market where rules can be contractually rewritten under stress, understanding what the documents allow is essential to protecting capital.
CREDX AI's Covenant Intelligent Platform is an interactive AI terminal for credit agreements.