Bank Earnings Get Mauled by “Leveraged Loan” Time Bomb

Bank Earnings Get Mauled by “Leveraged Loan” Time Bomb
by Wolf Richter • March 23, 2016


[font color="blue"]Distress ratio spikes to Financial Crisis level.[/font]

Banks have a few, let’s say, issues, among them: a source of big-fat investment banking fees is collapsing before their very eyes.

S&P Capital IQ reported today that there was an improvement in the “distress ratio” of junk bonds, after nearly a year of brutal deterioration that had pushed it beyond where it had been right after Lehman’s bankruptcy. The recent surge in oil prices seems to have lifted all boats for a brief period. But not “leveraged loans.” Their distress ratio spiked to the highest levels since the Financial Crisis!

Leveraged loans are the loan-equivalent to junk bonds. They’re issued by junk-rated companies to fund M&A, special dividends to the private equity firms that own the companies, or other “general corporate purposes.” They form 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 banks a lot of leeway.

But they’re too risky for banks to keep on their balance sheet. Instead, they sell them to loan mutual funds or ETFs, or they slice and dice them and repackage them into Collateralized Loan Obligations (CLO) to sell them to institutional investors, such as mutual-fund companies.

Regulators have been exhorting banks to back off. Banks can get stuck with them when markets get woozy just when the loans blow up, as they did during the Financial Crisis – or as they’re doing right now…. (more)

http://wolfstreet.com/2016/03/23/bank-earnings-leveraged-loans-distress-ratio/