It seems as if warning bells have been ringing in the sub-investment grade debt market forever. However, as commentators perpetually wail about covenant erosion and evaporating returns, all that happens is that the market gets bigger and bigger and bigger.
There are now $1.1 trillion leveraged loans outstanding in the US, according to S&P. The BIS quarterly review at the end of September asked if the rise of leveraged loans was a “risky resurgence”.
Chorus of concern
Even the IMF is concerned. In its most recent financial stability report, it pointed out that just over 50% of leveraged loan deals in the US had multiples of between 5 and 5.99, while around 28% had multiples of six or more. In Europe the numbers are even more concerning: 60% of deals have multiples between 5 and 5.99 and the number with a multiple of 6 or more is very nearly 30%.
The US multiples are a lagging indicator of the impact that lending guidelines – which have since been unofficially relaxed – have had on the market. The figures for Europe largely reflect what is going on in the UK, as that market accounts for a significant percentage of activity.