News reached us last week that the great mathematician, Monty Hall, passed away at the age of 96. Better known as the host of the 1960’s TV hit, “Let’s Make a Deal,” Mr. Hall lent his name to game theory for the so-called 3-Door Monty Hall Problem.
Behind three doors there’s a brand new car, and two goats. You pick Door #1. Monty tells you there’s a goat behind Door #2. Should you switch your choice?
We’ll return to this puzzler in a moment. But first, consider similar choices confronting leveraged loan investors. Should you pick a broadly syndicated loan that has no maintenance tests (i.e. cov-lite), a large middle market cov-lite loan, or a large middle market loan with a maintenance test, albeit a wide cushion between budget and test?
Of course, other considerations come into play in these credit analyses. But bigger and better companies earned cov-lite status because…well, they were bigger and better companies. With ebitda over $100 million, mega-credits were often bond issuers as well with cross-over accounts accustomed to incurrence-only financial tests.