Leveraged Loan Risks Aren’t Where You Think They Are
February 26, 2020DownloadsDownload Article
Leveraged credit markets continue to dominate much of the conversation among prominent commentators and industry leaders, almost always with cautionary language attached. Some brave souls have dared to warn of an unfolding bubble scenario in credit.
But the familiar storyline remains largely intact; an abundance of global capital in search of higher returns has kept demand for the loan asset class strong even as large borrowers continue to negotiate more favorable terms and conditions that arguably are pushing the boundaries of prudent lending and eroding many traditional safeguard provisions for lenders. This dynamic has prevailed for several years without any dire consequences to speak of; so naturally, large borrowers remain aggressive in their negotiations with respect to loan terms and deal leverage. Despite some hiccups along the way, it remains firmly a borrower’s market for both loans and bonds.
The latest prominent voice to weigh in on the topic is a trio of bank regulators (The Board of Governors of the Federal Reserve System, the FDIC, the Office of the Comptroller of the Currency) in the most recent Shared National Credit (SNC) report last month. While the language and tone of January’s SNC report sounds measured and bureaucratic, the message is unmistakably clear: “Credit risk associated with leveraged lending remains elevated.” The SNC report went on to comment, “Underwriting risks are often layered and include some combination of high leverage, aggressive repayment assumptions, weakened covenants, or permissive borrowing terms that allow borrowers to draw on incremental facilities and further increase debt levels.”
Most Popular Insights
- 10 Global Cybersecurity Predictions for 2024
- Global CFO Survey 2024
- Bridging the Gap Between Artificial Intelligence Implementation, Governance, and Democracy: An Operational and Regulatory Perspective
- The Power of Positive Paranoia: A Key Trait for Every CEO and General Counsel in 2024
- A Targeted Approach is Key to Implementing AI