'..But, as S&P’s Paul Draffin recently observed: “History shows us that the worst debt transactions are done at the best of times.” Just look at 2007.
So the Trump-era regulators ignore history at their cost. Yes, people such as Mr Otting may be right to point out that the “six times” rule was clumsy and crude. But it is foolish to be encouraging risky lending right now. On the contrary, what the OCC, Fed and FDIC should jointly be doing — along with the Securities and Exchange Commission — is shouting from the rooftops about the risks that non-bank investors (and some banks) face in the leveraged loan world. And they should do this before the current dealmaking boom spins totally out of control, and lossmaking companies, such as WeWork, pile on more cheap debt.''Just a few days ago the IMF warned about the risks of overheating in risky loan and bonds markets. “Signs of late cycle credit dynamics are already emerging in the leveraged loan market,” the IMF Global Financial Stability Report observes, noting that “in some cases, [this is] reminiscent of past episodes of investor excesses”.
Indeed, the IMF data are startling. When activity in the global leveraged loan sector last exploded, issuance peaked at $762bn in 2007. But last year issuance surpassed that, touching, $788bn, with $564bn worth of loans in the US. More than one-third of this lending was used for refinancing, and more than half was used to fund an explosion in leveraged buyouts or mergers and acquisitions.
More startling — and worrying — is a deterioration in credit quality. The proportion of US loans with a rating of single B or below (ie risky) rose from 25 per cent in 2007 to 65 per cent last year. And a stunning 75 per cent of all 2017 institutional loans were “covenant lite”, which means they offer few protections for investors if a company starts heading towards a default. That is the highest share on record.
..
Thankfully, there is little reason to expect an immediate crunch. After all, the American (and global) economy is growing, defaults are low and while ten-year bond yields rose above 3 per cent this week, the upward trend is gradual. But, as S&P’s Paul Draffin recently observed: “History shows us that the worst debt transactions are done at the best of times.” Just look at 2007.
So the Trump-era regulators ignore history at their cost. Yes, people such as Mr Otting may be right to point out that the “six times” rule was clumsy and crude. But it is foolish to be encouraging risky lending right now. On the contrary, what the OCC, Fed and FDIC should jointly be doing — along with the Securities and Exchange Commission — is shouting from the rooftops about the risks that non-bank investors (and some banks) face in the leveraged loan world. And they should do this before the current dealmaking boom spins totally out of control, and lossmaking companies, such as WeWork, pile on more cheap debt.'
- Gillian Tett,
Trump administration picks the wrong time to ease up on banks, April 26, 2018
ContextGillian Tett,
The unease bubbling in today's brave new financial world, January 19 2007
'..three decades of recurring boom and bust cycles..' - Doug Noland(Story) – 2007 overlaps 2018 ‘..in the event of a financial crisis and economic downturn.’(Story) – ‘..those BIS dissidents are muttering in the wings.’