Bloomberg Businessweek - USA (2019-06-17)

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officeratPotomacRiverCapital.“Leveragedloans

andcorporatedebtarenothousing,butmaybeit’s

morepervasivethanwethink.”

Themechanicsoftheleveragedloanmarket

willbefamiliartostudentsofthehousingcrisis.

Withinterestrateslow,investorsarewillingto

takegreaterriskstogethigheryields.Thatmakes

lotsofmoneyavailableforlending,whichinturn

makesit easierforlesscreditworthycompaniesto

borrow.Ratherthankeeptheriskyloansontheir

books,lendersoftensellthemtoassetmanagers

thatpackagethemintosecurities—CLOs—thatare

soldtoinvestorssuchasinsurersandhedgefunds.

YieldsontheriskiestportionsofCLOscan

approach9%a year.Andthegrowthofleveraged

lendinghasbeenboostedbypostcrisisbankreg-

ulationsthathelpedtheriseofshadowlenders—

financialcompaniesthataren’tregulatedlike

banks.Themarketforleveragedloanshasmore

thandoubledsince2012.

Therisk-takingcouldgetworse:Withdemand

byborrowersforleveragedloansdecliningthis

year,thosestilllookingforfinancinghavebeen

abletoextractlooserterms.Protectionsinloan

agreementsthataremeanttoshieldcreditorsfrom

defaultsaresomeoftheweakestever,accordingto

Moody’sInvestorsService.Andlendershavebegun

toacceptmoreaggressiveprojectionsoffuturecost

savingsandprofitsfromcompaniesseekingloans.

Rememberno-income-verificationmortgages?

Inrecentmonths,bothFedChairmanJerome

PowellandBankofEnglandGovernorMarkCarney

havecomparedsomeaspectsofthegrowthinlever-

agedlendingtomortgagesintherunuptothecrisis.

Andwhileneithersaidthere’sa risklargeenoughto

topplethefinancialsystem,bothconcedethere’sa

lotregulatorsdon’tknow,suchaswhothebuyers

areandhowwelltheycanabsorblosses.“Iamnot

confidentthatregulatorshaveorshareamongthem-

selvesthehigh-qualityinformationthattheyneed,”

ErikGerding,whospecializesinfinancialregulation

attheUniversityofColoradoLawSchool,saidata

congressionalhearingonleveragedloansonJune4.

“Wecannotwaituntilit is timetomanthelifeboats

tofullyfundtheicebergpatrol.”

About85%ofleveragedloansareheldbynon-

banks,accordingtoWellsFargoresearch.Butbanks

mayplaya largerrolethanmanyassume,according

toGauravVasisht,directorforfinancialregulation

attheVolckerAlliance,a good-governancegroup.

Banksareinvolvedinallstagesoftheprocess:They

underwriteloans,sellthemtotheCLOs,investin

thosesecurities,andthenhedgethoserisksinthe

market.“Onecommonnarrativeis thatbanksdon’t

havemuchriskoraren’texposedtoit,”Vasishtsaid

atthehearing.“Banksareexposedtoit.”

Thefinancialindustryis eagernottosoundcom-

placent.BrianMoynihan,chiefexecutiveofficer

◼FINANCE BloombergBusinessweek June 17, 2019

PHOTOGRAPH BY JANELLE JONES FOR BLOOMBERG BUSINESSWEEK. *AS MEASURED BY THE S&P/LSTA LEVERAGED LOAN INDEX; DATA: S&P/LOAN SYNDICATIONS & TRADING ASSOCIATION, BANK OF AMERICA MERRILL LYNCH

2003 2018

$1.2t

0.6

0

● Debtatyearend

◼Leveragedloans*

◼High-yield bonds