IFR Magazine – June 08, 2019

(Nancy Kaufman) #1

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Financial crisis guides


lev lending hearing


„ US Asset class has more than doubled in size since the credit crisis

Ten years out from the financial crisis and
legislators and regulators are sounding the alarm
about risks in the US leveraged loan market,
concerned that loosening lender protections and
aggressive terms in the asset class could weigh
on the overall US economy.
On Tuesday, a Congressional committee
discussed risks in leveraged lending with a panel
of professors as the credit crisis and high-profile
bankruptcy filings including toy store TOYS ‘R’ US,
weigh on committee members’ minds.
“In 2008, we went through the greatest
financial crisis since the Great Depression and
I don’t want to ever get back there and do that
again,” said US Representative Gregory Meeks,
a Democrat from New York who chairs the
Subcommittee on Consumer Protection and
Financial Institutions.
The 2017 bankruptcy filing of Toys ‘R’ Us was a
warning sign for the New York Democrat.
“It’s a question as to whether a bubble can
build when you are lending to companies that are
already deeply in debt; what happens if you have
multiple Toys ‘R’ Us all at one time,” Meeks said

in a telephone interview. “That was the question
I had about whether that would then create a
systemic risk.”
Years of low interest rates coupled with
increasing demand for floating-rate loans has
seen the asset class more than double in size
since the credit crisis, allowing companies to
borrow higher levels of debt compared with their
earnings than in the past while offering fewer
lender protections in return.

DIFFERING VIEWS
The Congressional hearing offered divergent
views on the state of leveraged lending amid
increased scrutiny of the asset class.
During a House Financial Services
subcommittee hearing titled “Emerging Threats
to Stability: Concerning the Systemic Risk of
Leveraged Lending,” Democratic representatives
shared their concerns about leveraged loans and
CLOs and the effect that debt may have on the
broader economy.
Their Republican colleagues took a different
tone, stressing the strong performance of CLOs
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