Option-adjusted spread on index of high-yield bonds issued in the US and spread to maturity on index of leveraged loans issued in the US measured relative to the spot Treasury curve. 9  Graham and Leary (2011), Harris and Raviv (1991). Atkinson (1967), Bernanke et al. (1996), Greenwood and Hanson (2013). 11 The characteristic feature of cov-lite loans is not that they have fewer covenants, but that the requirements bind less often, and in particular only in response to particular events (such as additional financing). More traditional, “cov-heavy” contracts require firms to meet such requirements continually (Becker and Ivashina (2016)). 10  15  All speeches are available online at www.bankofengland.co.uk/speeches  15  If you think there are parallels here with the subprime mortgage boom in the U.S., ahead of the last crisis, then you’d be right. Those too were grouped together and sold to investors as packages of loans, diluting the ability and incentive to monitor individual risks; they grew extremely rapidly, particularly in the last year or two of the boom – and, as it happens, they accounted at the peak for a similar share of their underlying market (13% of total U.S mortgage debt). We should recognise that, in aggregate, corporate leverage in the UK has fallen since the crisis (Chart 17, which includes bonds as well as bank loans).12 As with mortgages, interest payments on those debts remain well below average and, if bond markets are anything to go by, will remain so for quite a while yet.
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