The leveraged loans* market in the US ballooned in 2018. According to the US Federal Reserve’s latest Financial Stability Report (May 2019), leveraged loans outstanding reached $1.15 trillion in the 4th quarter of 2018, a growth of 20.1 percent during 2018 alone. At the same time, deteriorating lending standards and investors’ growing risk appetite have increased funds available to indebted companies and created fresh vulnerability within the financial system.

 

Why should this market be of such concern if it is a shadow of the size of other markets, such as residential and equities? An economic slowdown could easily trigger defaults on leveraged debt and subsequent employment and investment contractions by borrowers that would exacerbate the downside risk to broader economic activity. Leveraged loans financially constrain employment and investment decisions of these already indebted borrowers, linking these core business decisions to debt availability, availability of which is in turn vulnerable to corporate debt spread and lending standards.

 

With leveraged debt growing so aggressively, the Fed may hold off on further interest rate hikes if it assesses the bottom could come out from the otherwise well-performing leveraged loans market. At present, the Fed's position is optimistic on the basis that it believes today's leveraged loan bundles are better structured than pre-crisis residential mortgage bundles. 

  • While default rates may be relatively low - usually considered one sign of a strong economy - officials are already cautioning that this could change in the case of a slowdown.
  • The US’ tense global trade relations with a number of major markets and the inverted yield curve will give the Reserve still more pause. At the end of May, the short term bond yield exceeded the long-term bond yield for the first time since 2007, suggesting market pessimism with regard to near-term economic conditions. 

*A leveraged loan issued by a commercial or investment bank is extended to a company with considerable preexisting debt and/or poor credit history. Because of the higher risk of default by a leveraged borrower, this type of debt tends to carry higher interest rates than general loans. 

Alternative Data +

Your access to 100s of data vendor profiles, sample data, and dashboards with the latest in leading indicators. Discover new signals and insights with our Alternative Data + platform.

Aperçus connexes de Knoema

Bitcoin Energy Requirements Climbing

(29 April 2021) The volume of electricity consumed by bitcoin mining continues to grow globally, approaching the levels of energy consumption of some of the world's larger economies and bringing the environmental sustainability of the cryptocurrency into question. Tesla, which bought $1.5 billion worth of bitcoin in January, causing the price to surge to more than $55,000, became a target of bitcoin critics who say the step undermines the car company's environmental image. According to Digiconomist, a platform dedicated to exposing unintended consequences of digital trends, one...

The Panama Papers: Key Statistics

The Washington, DC-based International Consortium of Investigative Journalists (ICIJ) has released a database of the so-called Panama Papers - information leaked primarily from Mossack Fonseca, one of the world's leading global law firms providing services of incorporation of offshore entities and headquartered in Panama. The leak is the largest ever of offshore financial records and contains about 11.5 million legal and financial records dating back more than 40 years. The files expose more than 213,000 offshore entities created in 21 jurisdictions, stripping away the secrecy from...

Will Global Debt Expansion Trigger the Next Financial Downturn?

In the 10 years since the 2008-2009 global financial crisis, aka “Great Recession,” the global debt of the non-financial sector increased by 53 percent to reach $178 trillion in the third quarter of 2018, according to the Bank for International Settlements. Global debt, which represents the outstanding credit provided by domestic banks and other institutions to households, non-financial corporations, and government, is quite simply the driver of the modern economy. Over the 2008-2018 period, each percent of GDP growth in G20 countries required, on average, 1.6 percent of debt...

The Pressure of Low and Negative Interest Rates

Central banks around the world are increasingly resorting to more dovish monetary policies against a backdrop of slowing economic growth. Among the 38 central banks tracked by the Bank for International Settlements (BIS), 21 banks adopted interest rate cuts over the three-month period from July to September, compared to 13 during the same three-month period of 2018. Several advanced economies, including Denmark, Japan, Switzerland, Sweden, and the European Central Bank (ECB)-regulated Euro Area, have sustained negative interest rate environments for several years already and the...