But we'll give you a tiny hint anyway starting with two initials--Wall Street. To put it in man-on-the-street terms, covenant-lite debt is like a trapeze artist flying high up in the big top with only half a net beneath him. It's not so much that he falls but where he lands.
And in times like these you don't want covenant-lite debt lurking in your portfolio. Like the line in that old Kenny Rodgers' song: "You gotta know when to hold 'em and when to fold 'em." One such place these Wall Street gems might be lurking around is in your seemingly friendly bond or ETF fund.
You might want to think the energy sector here. Recall yield has been the lost Mecca for nearly seven years.
Know what your holding is fundamental advice worth its weight in Super Bowel 50 tickets. Back in the day, the early 1980s, there was something called PIK, payment in kind bonds. Some are still around, getting offered. They were all the rage. Bonds pay interest, usually every six months, so the theory goes the lender, Mr. Bondholder, is getting some of his cash back while waiting for the maturity date.
With PIK, instead of getting some cash in Mr. Bondholder's fat little hands every six months, what he gets is more fiat paper. In this case, backed by whatever covenants that might exist. So you might say, though some may disagree, covenant-lite and PIK debt share much of the same DNA.
And here's another point: both of them usually make their appearance, however long it might last, during good times, reminiscent of an old Rock 'd Roll song, "Let The Good Times Roll." Now we're not much into sailing, so we will leave it up to your imagination again to figure out what happens when the seas of Wall Street get really rough.
In the meantime, here's a Minksy Moment worth reading.
reuters.com/breakingviews/2015/11/27/review-another-minsky-moment-may-be-on-the-way/
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