Much craftsmanship has accompanied the revival of a corner of the credit market on Wall Street, which has many of the hallmarks of a bubble.
Anton Pil, managing partner of J.P. Morgan Asset Management, however, may have compiled it on Wednesday at a luncheon during which the company discussed its guide to alternative investments.
"This will end badly," Pil said, expressing his view that the growing appetite for so-called leveraged loans and the recent surge in production has brought some form of debt that has increasingly brought less protection to investors and restrictions on borrowers Known as covenant lite, Wall Street could become a major issue.
David Lebovitz, the company's global market strategist, recently cited his research, saying that the composition of home loan lenders has shifted from traditional banks to non-bank lenders. As a result, the quality of the leveraged loans has deteriorated.
As a result, "almost 80% of the leveraged loans issued last year were considered" Citeant Lite, "Lebovitz said during lunch, which included Pil and David Kelly, JP Morgan Asset Management's key global strategist.
Moody & # 39; s Investors Service said in January that the Loan Covenant Quality Indicator, which covers all investor protection in speculative bundle bundles, has risen to a record 4.16 and the recent high of 4.10 Third quarter exceeded from 2018 and again in the second quarter of 2018.
Leveraged loans are typically used to finance private equity transactions and mergers and acquisitions, as well as to refinance or recapitalize existing debts on a company's balance sheet.
Because floating rate bonds, a rising interest rate environment, as was the case in 2018, servicing this type of debt can make borrowers more expensive, making them more vulnerable to default. In addition, an economy in the final stages of expansion, where expectations of recession are rising, also creates an unstable background for risky lending, according to J.P. Morgan.
Borrowing in the US has increased in the past two years and has exceeded the level of the 2007-2009 financial crisis. Such borrowing reached a record $ 1.66 trillion in 2017 and was $ 1.46 trillion in 2018, according to Dealogic data. This is the largest two-year rise in the industry.
Private loans were attractive to institutional investors, such as pension funds, as they are not prone to price volatility, as in equities, and can offer higher yields than US government bonds or treasuries with ten-year US Treasury bonds
with a relatively low yield of 2.69%. For comparison, the average dividend yield for components of the Dow Jones Industrial Average
is 2.4% and the S & P 500 Index is 2.1%
according to FactSet, but also these benchmarks have so far risen by about 10% in 2019.
Both the International Monetary Fund (in a blog post) and the Confederation The Reserve has recently categorized the re-emergence of leveraged loans as a risk that should be considered.
Despite worries about leveraged loans, Lebovitz sounded more poignant than Pil about the potential for such a debt to evoke a systematic failure of the financial markets that resembled the implosion following the mortgage-backed securities debacle that prevailed around the world Decade.
"In our view, a wave of defaults would exacerbate the downturn in the economy as banks' exposure is low. We do not believe that this represents the same systemic risk as the mortgages in 2008, "he said.
Lebovitz noted, however, that a cycle of non-bank lenders who initiate private loans, according to the Bank of England, increases multiples in transactions.
"They estimate that the issuance of leveraged loans last year totaled around $ 800 billion worldwide. Of this $ 800 billion, approximately 60% of this leveraged loan was used to fund M & A (19459013) and LBO (19459014) transactions. All right, you have private loan funds that are now being lent to private equity firms, "he said."
Lebovitz said instead of freaking out, he said investors needed to go over their debts Invest in and invest in the managers they choose.
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