Blame it on the Vikings.

When those ancient Scandinavians settled Iceland around 870 AD, they cut down most of the trees for firewood and to clear land for planting and livestock. A thousand years later that country of volcanos and glaciers is struggling to reforest.

Despite planting three million trees across a land mass the size of Kentucky, it’s barely made a dent. Iceland’s ecosystem remains challenged by soil erosion and strong winds. “Simply everything was stripped away,” reported Dr. Gudmundur Halldorsson, a soil scientist. “This is what people don’t realize. You can lose something like this in relatively few years.”

This Icelandic parable reminds us of what’s happening today in the forest of middle market leveraged loans. As our special series on covenant-lite structures has detailed, the competition for lead-arranged transactions is compelling direct lenders to remove maintenance tests from smaller issuers that would otherwise protect those lenders.

This combined with the pressure loan buyers feel to put money to work is distorting the traditional checks and balances of sound credit underwriting. There’s also a misalignment of incentives.