IFR Magazine – June 08, 2019

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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