Covenants in the Coal Mine (First of Two Parts)

By the time you read this, the UK will be voting on its long-awaited referendum on whether or not to leave the EU. Polls show the contest too close to call. Whether “Remain” or “Leave” prevails, the Brexit outcome will undoubtedly impact international politics and the global economy for years to come.

Despite turmoil in the UK, along with the Fed’s inaction on rates, observers of US capital markets noted the relative calm surrounding both public equities and fixed income. While the Dow is down just under 2% since it reached a near record high of 18,005 on June 8, the industrial average slipped only modestly for the week.

Similarly the high-yield bond market continues to see issuance proceed apace. Though steep fund outflows ($1.8 billion) were recorded last week, new junk volume rang up $5.2 billion (per S&P LCD) for the period. That comes on the heels of $12 billion of deals the week before – a level not seen since last November.

Broadly syndicated loans are also shrugging off Brexit phobia, at least until the vote. While institutional volume is down 7% from last year’s activity, pricing and terms seem to reflect an enduring confidence that overall conditions will remain seller-friendly.