According to LeveragedLoan.com "A leveraged loan is a corporate debt instrument arranged by one or more investment banks and syndicated to a group of commercial banks and non-bank investors." It seems that this market is getting out of control there are far too many loans being made to poorer quality companies with very few restrictions (so called "covenant lite" issuance). The Federal Reserve is getting increasingly concerned about the rapid growth in volumes and values of these loans and rightly so - see Bloomberg story LINK1
Of course the Federal Reserve by keeping interest rates artificially low through Quantitative Easing and providing too much liquidity is partly to blame as investors take ever increasing risks in their hunt for yield. This means banks could be holding a lot of debt that blows up on them down the road if these low quality issuers get into trouble resulting in another financial crisis. According to Bloomberg the banks have arranged about $430 billion of U.S. leveraged loans sold to investors so far this year alone. The other issue that is of concern is that these high yield debt instruments lack liquidity so if a financial crisis comes along then it will be very difficult to get out of the bonds without taking a very large loss........BUYERS BEWARE! Nice video of trends in this market below.
Of course the Federal Reserve by keeping interest rates artificially low through Quantitative Easing and providing too much liquidity is partly to blame as investors take ever increasing risks in their hunt for yield. This means banks could be holding a lot of debt that blows up on them down the road if these low quality issuers get into trouble resulting in another financial crisis. According to Bloomberg the banks have arranged about $430 billion of U.S. leveraged loans sold to investors so far this year alone. The other issue that is of concern is that these high yield debt instruments lack liquidity so if a financial crisis comes along then it will be very difficult to get out of the bonds without taking a very large loss........BUYERS BEWARE! Nice video of trends in this market below.
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