Leveraged Loans Blow Out. Distressed Corporate Debt Spikes | Wolf Street
Leveraged loans are risky and murky. And they’re a big pile: $1.2 trillion of US-originated leveraged loans, up 50% from $800 billion in 2015. These loans are traded in slices like securities or are packaged into highly rated Collateralized Loan Obligations (CLOs). But for years, investors had the hots for them, driven by their relentless chase for yield, in a world of interest rate repression.
These companies are often owned by private equity firms that had acquired them through leveraged buyouts, during the process of which they loaded up the companies with debt. In addition, PE firms extracted special dividends from their companies, funded by leveraged loans, which is a form of asset stripping. This leaves the company more leveraged and more precarious and more likely to topple. But who cares? Those were the good times and the chase for yield was on.
The Fed, the Bank of England, the ECB, the Bank of Japan, etc., they have all warned about leveraged loans. But they don’t regulate them because central banks are not securities regulators. And securities regulators, such as the SEC, consider them loans and not securities, and they don’t regulate them either. And no one knows into whose balance sheets leveraged loans can blow holes. But now they’re blowing holes into balance sheets.
Bubbles may be popping in all directions.