From John Plender in FT on March 6, 2018:
Credit protections such as restrictions on the borrowers’ rights to dispose of assets, degrees of leverage and dividend payments are sacrificed in the manic search for yield. The biggest uses for such loans are the refinancing of existing debt together with funding for mergers and acquisitions.
Evidence suggesting an escalation of risk-taking in this area comes from the Institute of International Finance, a global financial services industry representative body.
It points out that issuance of US leveraged loans rose nearly 50 per cent in 2017 to more than $1.3tn, which is well above the pre-crisis peak of $710bn in 2007. The numbers in more bank-dependent Europe are smaller at more than $290bn in 2017, rather below the level of $330bn in 2007.
The share of covenant-lite loans in these totals has soared to nearly 50 per cent in the US and 60 per cent in Europe, much higher than before the crisis. [Link]
‘Leveraged loans’ are loans extended by one or more banks to entities that already have a good proportion of debt in their books.
One quibble with the article:
Against that background the transition from Janet Yellen to Jay Powell at the head of the Federal Reserve is potentially momentous because the scope for policy error over the next 18 months is considerable. On Capitol Hill last week, Mr Powell made it clear that the risk of an overheating economy may now become the focus of monetary policy.
The juxtaposition of the two sentences is problematic making it sound look as though policy tightening would be a mistake. Quite the contrary. It is never too late to stop such risks from becoming bigger and wider.