At Bloomberg Sarah Ponczek, Anchalee Worrachate, and Laura Benitez report that unease is growing in financial markets over loose monetary policy and the potential it has for creating an asset bubble. Of the areas drawing most concern, leveraged loans lead the pack. The authors write about the market for leveraged loans:
Few markets draw more concern than leveraged loans, used by typically junk-rated companies to fund everything from private equity buyouts to shareholder dividends.
The debt — either directly or through securitized products — usually ends up in the hands of mutual funds, pension funds, insurers and other institutional investors that are attracted to its high yields.
But leveraged loans exceeding $1 trillion in the U.S. alone have helped fuel a surge in corporate indebtedness. Research firm Covenant Review estimates that companies using them to fund buyouts and acquisitions have seen their borrowings swell to 7.7 times earnings before interest, taxes, depreciation and amortization. Four years ago, the debt-to-Ebitda ratio was just 5.5 times.
With so much money chasing a limited supply of debt, companies have been able to borrow at cheaper rates and extract generous concessions, eroding the checks and balances that protect creditors. In fact, so-called covenant-lite loans now make up a majority of the debt issued in the market.
They also warn of other areas that could be hit hard, including:
- Private credit
- Zombie firms
- Sovereign debt
- European credit
If the Fed creates another bubble in asset markets, and it collapses, will the central bank ever be able to restore the public’s confidence in it?
Jeremy Jones, CFA
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