https://retirementplanningscottsdale.com/2019/03/23/anil-vazirani-states-leveraged-loans-could-turn-into-a-problem-on-wall-street/ Anil Vazirani states Leveraged Loans could turn into a problem on Wall Street
Per Anton Pil, managing partner at J.P. Morgan Asset Management, “This will end poorly,” Pil said, expressing his view that growing appetite for so-called leveraged loans and a recent surge in production of a form of that debt that has increasingly carried fewer protections for investors and restrictions for borrowers — known as covenant lite — could blossom into a bigger problem on Wall Street.
David Lebovitz, global market strategist at the firm, citing recent its research, said the composition of lenders in private credit has shifted away from traditional banks and toward nonbank lenders, and as a result, the quality of leveraged loans has deteriorated.
Back in 1994, 71% of so-called leveraged loans were funded by bank lenders and 29% were provided by nonbanks. Now, 91% of leveraged loans are provided by nonbank lenders, Lebovitz explained.
Leveraged loans are typically used to finance private-equity transactions and mergers and acquisitions, as well as to refinance or recapitalize existing debt on a company’s balance sheet.
Because that debt carries floating interest rates, a rising interest-rate environment like the one that was in play in 2018, can make servicing that type of debt more expensive for borrowers, making them more prone to defaults. Moreover, an economy in the latter stages of expansion, where the expectations for a recession are growing, also creates an unsteady backdrop for risky credit, the J.P. Morgan asset managers said.
Both the International Monetary Fund, in a blog post, and the Federal Reserve have recently flagged the re-emergence of leveraged loans as a risk worth closely watching.
“In our view, a wave of defaults would absolutely exacerbate any downturn in the economy because bank exposure is modest, we don’t think it poses the same systemic risk as mortgages did back in 2008,” Lebovitz said. That said, he noted that a cycle of nonbank lenders pushing private loans was driving up multiples on deals, according to data from the Bank of England. “The increasing amount of leverage in the system, generally, is pushing up the multiples you’re seeing on these deals,” Lebovitz said. So, rather than freak out, Lebovitz said investors need to be discerning about the debt they invest in and the managers they choose.
Read more: https://www.thewealthadvisor.com/article/will-end-poorly-jpm-says-about-obscure-credit-bubble
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