Junk bonds getting junkier.

Felonious footnotery is an overstatement. But reading the financing small print of KKR & Co.’s latest buyout would be enough to make even Michael Milken blush.

The private equity titan has raised $1.4bn of junk notes to consummate the purchase of “I Can’t Believe It’s Not Butter” maker Flora Food (read Unilever) – the said product’s consistency sharing a similarity with its acquirer’s lenders terms.

The difference between bonds and stocks is that management is out to increase the value of the latter (to which they themselves belong), sometimes at the expense of the former. Bondholders, generally, are only entitled to interest (such as it is) and their principal returned at the end of the term. As such, covenants tend to protect the bondholder, such as: lien covenants to avoid senior creditors becoming junior; change-of-control covenants to stop the company being sold from under creditors; restricted payment covenants to route cash to interest payments rather than offpiste undertakings by management.

Recent trends have seen the evisceration of covenants - Flora Food is the extreme case, but not the exception. Covenant Review and Moody’s agree that Flora Food’s covenants afford creditors protection in the same way wearing a colander would afford a soldier protection in Bazra. Moody’s, on their scale of one to five (five being the weakest), scored the notes a 4.99.

This is probably because debt covenants in this case allow for more debt. A lot more debt. All of which can be senior. Any portion of the notes could be refinanced with senior secured debt at any time. The company has the flexibility to decide when the leverage ratio is calculated, as well as the ability to ignore certain debt when calculating it. Interestcoverage ratios are for the borrower to calculate (giving the company pro forma effect to apply cost savings relating to almost anything) as it deems most convenient.

Senior subordinated, honour system bonds.