The Race to the Bottom
Howard Marks · 2007
"Investors competing to accept ever-worse terms and lower returns are sowing the seeds of the next crisis."
In February 2007 — months before the credit crisis broke — Howard Marks warned about a “race to the bottom” in debt markets. Lenders competing for deals were abandoning the protections and covenants that had long kept them safe, accepting ever more risk for ever lower returns.
When capital is plentiful and yields are low, investors desperately chase returns. Borrowers take advantage of this by demanding 'covenant-lite' loans, stripping away the legal protections that allow lenders to intervene if the business struggles. This creates a dangerous asymmetric risk profile: the lenders accept a permanently capped upside (the low interest rate) while taking on essentially equity-like downside risk if the company defaults.
What is a 'covenant-lite' loan?
Read more about the topic
The explanation above is written with AI assistance. These are the originals — go to them to check it.
- The Race to the Bottom — the original Oaktree memo (Feb 2007)Oaktree Capital
- Line-by-line breakdown of Marks's "Race to the Bottom" memoStreetFins
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