Weak covenants as a cause of lower recovery rates in the near future! – Part II

In a piece in this blog on January 8, I asked for more discussion on the issue of weak covenants in loan agreements. I am sure these things have been discussed extensively elsewhere since then but I cannot resist referring to Wilbur Ross in FT (May 2). He does not seem to think that widespread covenant-lite financing will help the typical struggling company get through the crisis alive. I agree with him fully on that! He further argues that the only new thing is who will pull the (default-) trigger. Its used to be banks (who wanted their money back), now it is instead the trade creditor. And this is done much more sudden! Sounds logical to me! As a result [my interpretation] we might see a whole lot of sudden defaults, smaller as well as larger, in 2008 and 2009. And as a consequence of the cov-lites the recovery rate might be lower than the historical average.