Leveraged loans pose a menace to the nation’s otherwise humming economy, according to Bank of America CEO Brian Moynihan. And he ought to know: B of A is the top issuer of them.
“It’ll be ugly for those companies if the economy slows down and they can’t carry the debt and then restructure it, and then the usual carnage goes on,’’ said Moynihan, in an appearance at the Economic Club of New York. He took pains to say his own bank did not participate in iffy loan deals, adding that it puts a premium on “responsible growth.”
Leveraged loans, in which the banks are lending to highly indebted companies, have expanded nicely in recent years. In 1998, the loans were dwarfed in volume by junk bonds, by a 7-to-1 ratio.
Loans first took off in the M&A-crazed years before the financial crisis, almost reaching parity with junk bonds. Last year, the amount of outstanding leveraged loans stood at a par value of $1.04 trillion, versus $1.28 trillion for junk bonds.
The loans advantage is their more flexible structure. Namely, they are floating rate and often have lower coupons than do junk bonds, a plus with corporate issuers.
But beware, the bank chief said. “We don’t see anything yet because the economy’s good, the companies are making money,” Moynihan said, as reported by Bloomberg. Bank of America floated $317 billion on these loans in 2018, comprising 10.8% of that market, by Bloomberg’s count.
The B of A CEO decried the lighter covenants that the loans have these days (a condition that junk bonds display, too). With fewer restrictions, the worry is that issuers can get into trouble, but lenders won’t be able to call their loans. These looser terms, Moynihan said, are a problem “we should worry about.”
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