Troubled Debtors Use Loose Deal Terms to Keep Defaults at Bay

Even with a looming economic recession, the highest inflation in decades and interest rates surging to levels not seen since the financial crisis, default rates are likely to remain low.

That’s because the terms agreed in leveraged loans and high-yield bonds have become much looser over the past few years. They’re allowing borrowers to buy time before needing to sit down and negotiate with lenders, and are potentially letting them avoid the discussion altogether.

These increasingly common covenant-lite debt instruments -- popularized by private equity firms -- strip off protection for investors and reduce the amount they may recover if ...