The Fed Broadsides $1.3-Trillion “Leveraged Loan” Marketplace Pose

From Wolf Street, Nov. 6: 

PE firms are all over this, simply investors are yet chasing yield.

Since the Federal Reserve started alarm nigh the risks of “leveraged loans” inwards 2014, the amount of the U.S. leveraged loans outstanding has surged amongst delicious irony from $700 billion to $1.3 trillion. These things are hot. And instantly the Fed is fifty-fifty to a greater extent than worried.

The latest alarm came from Todd Vermilyea, who leads the Risk, Surveillance, in addition to Data sections at the Fed Board of Governors’ Division of Banking Supervision in addition to Regulation. His responsibilities include, every bit he says, the Shared National Credit program, “a telephone substitution interagency computer program that reviews in addition to assesses adventure inwards the largest in addition to most complex credits shared yesteryear multiple fiscal institutions.”

Leveraged loans are issued yesteryear highly leveraged companies amongst below-investment bird credit ratings (“junk”) to fund primarily:

• Leveraged buyouts (LBOs) where a private-equity theater buys a companionship that in addition to hence has to borrow the coin to fund its ain acquisition.
• Special dividends yesteryear the acquired companionship dorsum to its PE theater owners. The euphemism for this shape of property stripping is “recapitalization.”
• Refinancing existing debt to laissez passer the companionship a leg upwardly amongst creditors.

Regulators reckon leveraged loans likewise risky for banks to perish along on their residue sheet, hence banks rearrange them, construction them, collect hefty fees, in addition to sell them to loan usual funds, pension funds, in addition to other institutional investors, domestic or foreign.

Investors accept the hots for leveraged loans because they pay a higher yield, in addition to because the yield is based on a floating charge per unit of measurement that rises every bit involvement rates rise. But this is also 1 of the reasons these loans are even riskier inwards a rising-interest-rate environment.

In his remarks at the Loan Syndications in addition to Trading Association Conference inwards New York, Vermilyea warned that “there may hold upwardly cloth loosening of damage in addition to weaknesses inwards adventure administration of the leveraged loan market,” in addition to that “some institutions could hold upwardly taking on adventure without the appropriate mitigating controls.”

Then he went into the specifics of the surge inwards risks in addition to abuses that banking concern supervisors are finding:
“Cov-lite” leveraged loans

“Covenant-lite” refers to loans that create non comprise fiscal functioning safeguards for the lender, such every bit specific commitments to hold fiscal ratios related to debt service. These types of loans used to hold upwardly reserved for the highest character borrowers. Today, “cov-lite” structures are widespread.
How cov-lite loans would perform inwards a downturn is non good understood because information are non available.....

 ....MUCH MORE

Previously:
Ha! "Wall Street Loves These Three Letters. The Rest of Us Should Be Wary."

even riskier inwards a rising-interest-rate environment.

In his remarks at the Loan Syndications in addition to Trading Association Conference inwards New York, Vermilyea warned that “there may hold upwardly cloth loosening of damage in addition to weaknesses inwards adventure administration of the leveraged loan market,” in addition to that “some institutions could hold upwardly taking on adventure without the appropriate mitigating controls.”

Then he went into the specifics of the surge inwards risks in addition to abuses that banking concern supervisors are finding:
“Cov-lite” leveraged loans

“Covenant-lite” refers to loans that create non comprise fiscal functioning safeguards for the lender, such every bit specific commitments to hold fiscal ratios related to debt service. These types of loans used to hold upwardly reserved for the highest character borrowers. Today, “cov-lite” structures are widespread.
How cov-lite loans would perform inwards a downturn is non good understood because information are non available.....

 ....MUCH MORE

Previously:
Corrected—Next Big Short? "Warnings mountain for leveraged-loan market"

even riskier inwards a rising-interest-rate environment.

In his remarks at the Loan Syndications in addition to Trading Association Conference inwards New York, Vermilyea warned that “there may hold upwardly cloth loosening of damage in addition to weaknesses inwards adventure administration of the leveraged loan market,” in addition to that “some institutions could hold upwardly taking on adventure without the appropriate mitigating controls.”

Then he went into the specifics of the surge inwards risks in addition to abuses that banking concern supervisors are finding:
“Cov-lite” leveraged loans

“Covenant-lite” refers to loans that create non comprise fiscal functioning safeguards for the lender, such every bit specific commitments to hold fiscal ratios related to debt service. These types of loans used to hold upwardly reserved for the highest character borrowers. Today, “cov-lite” structures are widespread.
How cov-lite loans would perform inwards a downturn is non good understood because information are non available.....

 ....MUCH MORE

Previously:
“Concerned” Bank of England Raises Alarm nigh Growth of High-Risk Loans"

even riskier inwards a rising-interest-rate environment.

In his remarks at the Loan Syndications in addition to Trading Association Conference inwards New York, Vermilyea warned that “there may hold upwardly cloth loosening of damage in addition to weaknesses inwards adventure administration of the leveraged loan market,” in addition to that “some institutions could hold upwardly taking on adventure without the appropriate mitigating controls.”

Then he went into the specifics of the surge inwards risks in addition to abuses that banking concern supervisors are finding:
“Cov-lite” leveraged loans

“Covenant-lite” refers to loans that create non comprise fiscal functioning safeguards for the lender, such every bit specific commitments to hold fiscal ratios related to debt service. These types of loans used to hold upwardly reserved for the highest character borrowers. Today, “cov-lite” structures are widespread.
How cov-lite loans would perform inwards a downturn is non good understood because information are non available.....

 ....MUCH MORE

Previously:
Bonds: And Then There's the ETF/ETF holdings Liquidity Mismatch

even riskier inwards a rising-interest-rate environment.

In his remarks at the Loan Syndications in addition to Trading Association Conference inwards New York, Vermilyea warned that “there may hold upwardly cloth loosening of damage in addition to weaknesses inwards adventure administration of the leveraged loan market,” in addition to that “some institutions could hold upwardly taking on adventure without the appropriate mitigating controls.”

Then he went into the specifics of the surge inwards risks in addition to abuses that banking concern supervisors are finding:
“Cov-lite” leveraged loans

“Covenant-lite” refers to loans that create non comprise fiscal functioning safeguards for the lender, such every bit specific commitments to hold fiscal ratios related to debt service. These types of loans used to hold upwardly reserved for the highest character borrowers. Today, “cov-lite” structures are widespread.
How cov-lite loans would perform inwards a downturn is non good understood because information are non available.....

 ....MUCH MORE

Previously:
The Corporate Bond Market Is Getting Junkier

And many more, we're a wee chip concerned nigh this.