June 21 (LPAC) More than a third of all loans made by financial institutions in the United States thus far this year, have been "cov-lite," according to Standard and Poor's Leveraged Commentary Data (S&P LCD), an industry newsletter. This means that the loans contain either watered-down bond covenants, or none at all.

Normally, a bank would insert convenants into loans, so that lenders and investors are protected: stipulations, such as minimum levels of interest coverage, or the obligation to publish quarterly reports, or sometimes, to meet performance standards. The S&P LCD reported, "Talk is that arrangers [investment banks] are being told not to bother calling [private equity] sponsors for new mandates unless they are prepared to do cov-lite."

At the same time, banks are "experimenting" with even more complex deals that do not require borrowers to make any repayment until the end of the loan, sometimes called a "toggle" loan.

Sound like subprime mortgages?

Not incidentally, the surge in cov-lite and other dangerous gimmicks, which make lending more available, have added to the wall of money that private equity firms and hedge funds have at their fingertips for taking over and asset stripping industry.