Leveraged Lending:Where is the Risk in the U.S. Banking System? (Late Stage Credit Cycle Behavior Emerging)

...Explosive Growth in Leveraged Loans: Leveraged loan volumes have increased significantly since 2013, primarily due to increased M&A activity, as well as investor demand for floating- rate instruments. With an influx of investors seeking higher returns, borrowers have been able to achieve increasingly friendly terms. Underwriting standards including pricing, leverage and documentation language have weakened, and underlying borrowers face exposure to rising interest rates since loans are largely floating rate. Combined with the "lateness" in the credit cycle, these risks increase the likelihood of asset underperformance and could lead to higher than expected losses. While U.S. banks are exposed to the leveraged loan market on several fronts, the risks appear manageable in the near term. Bank Exposed in Four Ways: U.S. banks are exposed to leveraged lending risk in four ways: as underwriters and distributors; as holders of these loans on their balance sheet; as providers of financing to nonbank...

Special Report