The leveraged loan market’s growth has created some investor concern. Much of the growth has been driven by collateralized loan obligation demand. These buyers are more concerned about the loan characteristics fitting their model than about the credit and covenants. As a result, “covenant-lite” deals have grown substantially, which typically reduces default risk but also reduces recovery values. This loan growth has resulted in “first lien” obligations becoming a greater proportion of corporate capital structures – also potentially reducing the recovery value of high yield bonds. These concerns will be more valid when the credit cycle turns. But fundamentals suggest the cycle is still going strong, with interest coverage ratios high and default rates falling. Further, the loans market has grown into a separate asset class. An increasing number of loan issuers only issue in that funding market – not the high yield market as well. Per the chart, 59 percent of the leveraged loan market is completely separate from the high yield market. The loan market’s effect on high yield deserves consideration, but should be kept in perspective.