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Janet Yellen joins the chorus of warnings about leveraged loans

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janet yellen
Federal
Reserve Chair Janet Yellen speaks during a news conference
following the Federal Open Market Committee meeting in
Washington, Wednesday, Dec. 13, 2017

Carolyn Kaster/AP

  • Former Fed chair Janet Yellen told the Financial Times she is
    concerned about increasingly lax standards in the market, now
    valued at about $1.6 trillion. 
  • “I am worried about the systemic risks associated with
    these loans,” she said.
  • After Trump took office, his appointees told the
    banking sector that they were going to be less strict about
    loan leverage.

Former Federal Reserve chair Janet Yellen said she is
concerned about increasingly lax standards in the market for
leveraged loans, the
Financial Times reported

Yellen echoes warnings from the Fed,
the
Bank of England
, the Reserve
Bank of Australia
 
about the corner of the
debt market that, according to the Institute of International
Finance, has ballooned to $1.6 trillion.

“I am worried about the systemic risks associated with
these loans,” the former central banker said in an interview with
the FT.

“There has been a huge deterioration in standards;
covenants have been loosened in leveraged lending.”

Central banks are starting to worry that the corporate
world may have taken on too much debt, and that the stock of
risky debt overhanging the global economy might start to behave
the way subprime mortgages did before 2008.

The Bank of England recently suggested that leveraged
loans might become a bigger problem than subprime mortgages
were
:

“The Committee is concerned by the rapid growth of
leveraged lending, including to UK businesses,” the BOE’s
Financial Policy Committee said earlier in October.

“The global leveraged loan market is larger than — and
growing as quickly as — the US subprime mortgage market was in
2006.”

In the UK, leveraged loans to British companies have
hit a record, at about £40 billion ($52 billion) in 2018 alone,
according to the Bank of England. Compare that figure to before
the crisis, when new issuances of such loans only totalled
£30 billion ($39 billion).

In 2013, the “issuance” of new leveraged loans peaked at
$607 billion globally. But regulators
under President Obama frowned publicly upon excess leverage
,
and the market declined through 2015 to a low of $423 billion.
After President Trump took office, however, his
appointees told the banking sector that they were going to be
less strict about loan leverage
. In 2017, new loan issuance
went back up, to $650 billion — a new record.

Put simply, leveraged
loans are given to troubled companies
 who
can’t get access to cheaper credit via a normal loan from a bank
or by raising an investment-grade corporate bond.

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