Investors in the kinds of corporate debt that former Fed Chair Janet Yellen warned about a month ago have never been more exposed, according to Moody's Investors Service.
Covenant quality, or the protections lenders get, reached a historic low in the third quarter, the most recent period for which data are available, according to an indicator the ratings agency uses. The reading sank to 4.16 on a scale that considers 1 the maximum protection and 5 the minimum.
"Lenders are exposed to greater risks than ever before," Derek Gluckman, senior covenant officer at Moody's, said in a research note with others. "Once again, our scores reflect weaker protections on a year-over-year basis in nearly every risk category we assess. Given the breadth and depth of covenant weakness, existing loans are in uncharted territory."
Leveraged loans are given to companies that already have high levels of debt versus capital and often have poor credit. So they're already risky, and the lack of strict covenants makes then even more so.