The good news is that investors will find slightly betterprotection on leveraged loans this year. The bad news, according toMoody's Investors Service, is that loan covenants will remaincategorically weak for a fourth straight year.

“Investors in today's volatile market are being exposed torising risk as they forfeit key levers traditionally available tothem when a borrower is in financial distress,” Moody's analystslead by Enam Hoque wrote in a March 8 note to clients. Data“indicate that covenant protections remain stubbornly weak.”

Moody's loan covenant quality score, judged according to sevenfactors including asset sales without lender approval and the useof net debt in calculating leverage ratios, has remained “weak”since 2013.

A drop in issuance in 2016 may allow investors to be moreselective and “to receive protections that were not available inthe red-hot market of 2013 and 2014,” Moody's analysts wrote.

The latest report comes as banking regulators have been tryingfor more than two years to curb excessive risk-taking by WallStreet's biggest lenders as they seek to limit their exposure toloans made to heavily indebted companies.

Contributing to the weakness are leveraged loans with littleprotection known as ” covenant lite,” which typically strip outminimal financial-maintenance requirements such as provisions thatlimit additional debt a borrower can incur. These reached a record56 percent share of total issuance last year, even as overallissuance declined, according to data compiled by Bloomberg. Theshare of covenant-lite loans have dropped to 44 percent thisyear.

“The continued dominance of covenant-lite loans in the marketcontinues to drag the average score down,” the analysts wrote. “Inorder for covenant quality to significantly improve, investors mustpush back and demand better protections.”

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