Cracks have formed in the roughly $1.2 trillion leverage loan market that could bring the sector closer to a “point of no return” should conditions in this corner of corporate finance further deteriorate, Bank of America Merrill Lynch analysts warned.
Debt-laden U.S. companies have turned to the leveraged loan market in droves over the past decade for easy credit with fewer strings attached, but the past 12 months have seen a sharp drop in appetite for this type of debt and more recent indications point to the potential for long-feared defaults to spike.
“We are seeing numerous new signs of tightening credit conditions just in the past few weeks and months, ranging from wide market bifurcation, to prevalence of downgrades, to rising distress, to lower availability of capital for the lowest rated names,” wrote a team of Bank of America Merrill Lynch analysts led by Oleg Melentyev, in a Friday note to clients.
“We believe these are very important developments that deserve our full attention; their further deterioration from here could indeed move us closer to the point of no return, where the forces of a cyclical turn become irreversible”, they said.
Red flags have been raised in recent years by credit rating agencies, regulators, the International Monetary Fund, and even by bankers in the business about dangers of the leveraged lending boom ending badly.
Jes Staley, chief executive officer at Barclays, in a bid to address fresh concerns about the market told Bloomberg TV in an interview Friday[1] that recent struggles by banks, including Barclays, to offload some $2 billion of leveraged loans to buyers has “opened people’s eyes that it’s not a free ride right now.”
That wasn’t the case a short time ago when...