Another Subprime Crisis in the Making?

Syndicated Bank Loans

Many, if not most, of the billions of dollars in syndicated bank loans that have been issued since 2003 have lacked many of the most fundamental of protections for lenders.

This is syndicated bank debt that might ultimately come to be owned by taxpayer-backed public pension funds, retail mutual funds, and possibly even our government.

Troubling trends in covenant language include the now commonplace inclusion of clauses:

• Permitting collateral securing the repayment of a loan to be freely substituted - or even released - rendering the ostensible protection of a "secured" loan illusory.
• Granting borrowers the ability (via hedging, swap transactions and other means) to issue unlimited amounts of secured debt on an equal basis with the "secured" loan, diluting the secured creditor's protection.

A healthy and sustainable lending environment is contingent upon secured creditors demanding time-tested standards in their loan documents.

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