Leveraged lending continues to be a topic of concern in Washington as Congress, regulators and news outlets question the risk such loans could pose during an economic downturn.
House Committee Financial Services Committee “Megabank” Hearing
This month, the House Financial Services Committee held a hearing where CEOs of seven of the largest banks in the country testified on the safety and soundness of their institutions in the post-Financial Crisis era. When questioned about areas of potential risk, varying levels of concern were raised surrounding leveraged lending and the role that nonbanks play. Several CEOs expressed their opinion that increased oversight and studying of the leveraged loan space may be necessary.
Remarks from SEC Chairman
SEC Chairman Jay Clayton also stated he has concerns that leveraged loans could hurt liquidity in a downturn. Speaking earlier this month, he characterized the loans as “a case where liquidity expectations may be out of whack.”
Clayton highlighted his worry that during an economic downturn, the lenders holding leveraged loans on their books may not be able to receive payment for those loans from highly indebted companies— which in turn could hurt the ability of lenders to pay their own obligations.
Reporters Hone In
An Axios Markets newsletter published in April summarized fears about the proliferation of leveraged loans. Explaining how these loans evolved, Axios highlighted the growth of “covenant-lite” loans, which have fewer safeguards than traditional loans.
The article also conveyed worries over consumer debt, which has suffered from artificially inflated credit scores that have risen over the past decade and “[mask] the real danger the riskiest borrowers pose…”
Axios noted an economic downturn could lead to a wave of defaults as cash-strapped borrowers struggle to make payments, but said a repeat of the 2007 systemic failure is unlikely.
Amid increased attention to the leveraged loan market by policymakers and the media, it is important for those in the leveraged lending space—both originators and borrowers—to be prepared to engage on these issues. They will likely remain a focus, especially with a Democrat-controlled House.
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