And Now Defaulted Leveraged Loans Go Kaboom

And Now Defaulted Leveraged Loans Go Kaboom
by Wolf Richter • October 26, 2015


“It’s been a rotten year for distressed and defaulted loan paper.” That’s how S&P Capital IQ LCD starts out its report on leveraged loans.

“Rotten” may be a euphemism. So far, 2015 has been the worst year for defaulted “leveraged loans” since 2008 when the US financial system imploded under its own excesses.

Leveraged loans are the loan-equivalent to junk bonds. They’re issued by junk-rated over-indebted companies often to fund M&A – such as the loans issued by junk-rated, over-indebted Valeant – or to pay a special dividend to the private equity firms that own the companies, which is a form of financial strip-mining. They’re an $800-billion market and trade like securities. But the SEC, which regulates securities, considers them loans and doesn’t regulate them. No one regulates them. This gives issuers and banks a lot of leeway.

Leveraged loans are too risky for banks to keep on their balance sheet. Instead, they sell them to loan mutual funds or ETFs so that they can be moved into conservative retirement portfolios, or they repackage them into Collateralized Loan Obligations (CLO) to sell them to institutional investors, such as mutual-fund companies.

But banks can get stuck with them when markets come out of their euphoria, as they did during the Financial Crisis. So the Fed and other regulators have been exhorting banks for two years to back off. With some success: issuance has started to decline. .................(more)

http://wolfstreet.com/2015/10/26/and-now-defaulted-leveraged-loans-go-kaboom/