At my hedge fund’s weekly macro meeting, I noted the divergent trends in covenants. For newly issued BBB bonds, there is an increase in change of control covenants, which would allow bondholders to sell their bonds at investment grade levels (if not better) in a takeover.

But in bank loans to entities acquiring corporations, the covenants are getting weaker. I’m afraid that banks care more about present earnings than future earnings. Risk is getting transferred from the public equity space to the bank loan and private equity spaces. Personally, I think the eventual result will be ugly, though the current set of deals does not seem outlandish.