Will $4.6 Trillion Leveraged Loan Market Cause The Next Financial Crisis?

• Will $4.6 Trillion Leveraged Loan Market Cause The Next Financial Crisis?
  by Peter Cohan, http://www.forbes.com/
  Financial crises take about a decade to be born. Having lived through four of them, I see the raw materials for a fifth one — flowing from the collapse of so-called leveraged loans — debt piled on top of companies with weak credit ratings.
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  Before examining the latest news on leveraged loans, let’s take a quick tour down the memory lane of financial crises I’ve lived through. 
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  My first one was in 1982 — that’s when banks lent too much money to oil and gas developers in Oklahoma and Texas as well as local real estate developers. At the suggestion of McKinsey, money-center banks like Chemical Bank thought it would be a great idea to buy a piece of those loans. It’s all described nicely in a wonderful book — Belly Up.
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  Too bad the price of oil and gas tumbled, leaving lenders in the lurch and causing a spike in bank failures that gave me the chance to spend a balmy summer in Washington helping the FDIC develop a system to manage the liquidation of those failed banks.
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  What does this little financial crisis tour have to do with leveraged loans? I have often cited the Mark Twain’s expression that history does not repeat itself, but sometimes it rhymes.
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  I think leveraged loans rhyme with junk bonds and subprime mortgages. Banks make leveraged loans “to companies that have junk credit ratings in the hope of quickly selling the debt to investors, including mutual funds, hedge funds and entities called collateralized loan obligations,” according to the New York Times.
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  Why the rhyme? As in the late 1980s, leveraged loans are made to companies with bad credit ratings; like subprime mortgages they are being packaged into securities that supposedly give investors a diversified portfolio; and like the early 1980s crisis, there is excess debt on the books of energy and mining companies.
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  What’s more, leveraged loans are not small potatoes. Since the end of 2008, Thomson Reuters calculates that corporations have used them to borrow a whopping $4.6 trillion. 
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  Leveraged loans are slowing down. Last year, companies used them to borrow $940 billion but so far in 2015, they’ve taken on a mere $700 billion worth of that debt, according to Thomson Reuters. And more borrowers are not paying up. In September, Fitch Ratings forecast that leveraged loan default rates could approach 2% by the end of 2015, after five August defaults totaling $1.4 billion.
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  read more.

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