High-Yield Debt Covenants and Their Real Effects

The U.S. leveraged (high-yield) loan market has more than doubled since the Great Financial Crisis (GFC), with nearly $1.2 trillion in outstanding debt in 2019 (Leveraged Commentary and Analysis, LCD). The rise in high-yield corporate debt (bonds included) in the decade following the GFC has prompted concern in the U.S. and Europe, with central bankers and other policy makers frequently pointing to its potential to amplify any economic shock.

The problem with high corporate leverage is that it can lead to financial insolvency, which can trigger a contraction in demand like what we saw in 2020. Firms can be left … Read more