Tag Archives: bank loans

Janet Yellen Says It’s Time For “Alarm” As Leveraged Loan Bubble Runs Amok

The deluge of leveraged loans is getting increasingly difficult to regulate as it takes over Wall Street. A new report brings up a perfect example of this: Bomgar Corp., who just lined up $439 million in loans. It was the company’s third trip to the debt markets this year and estimates have the company’s leverage potentially spiking as high as 15 times its earnings going forward, raising the obvious question of the risk profile of these loans.

As rates move higher like they are now, the loans – whose interest rates reference such floating instruments as LIBOR or Prime – pay out more. As a result, as the Fed tightens the money supply, defaults tend to increase as the interest expenses rise and as the overall cost of capital increases. And because an increasing amount of the financing for these loans is done outside of the traditional banking sector, regulators and agencies like the Federal Reserve aren’t able to do much to rein it in. The market for leveraged loans and junk bonds is now over $2 trillion. 

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Escalating the risk of the unbridled loan explosion, none other than Janet Yellen – who is directly responsible for the current loan bubble – recently told Bloomberg that “regulators should sound the alarm. They should make it clear to the public and the Congress there are things they are concerned about and they don’t have the tools to fix it.”

Thanks Janet.

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As we noted recently, the risks of such loans defaulting are obvious, including loss of jobs and risk to companies on both the borrowing and the lending side. 

Tobias Adrian, a former senior vice president at the New York Fed who’s now the IMF’s financial markets chief, told Bloomberg: “…supporting growth is important, but future downside risks also need to be considered.” He also stated that regulators had “limited tools to rein in nonbank credit”.

But you’d never know this by listening to the Federal Reserve. According to Fed chairman Jerome Powell, during his press conference Wednesday, the Fed doesn’t see any risks right now. Powell said that “overall vulnerabilities” were “moderate”. He also stated that banks today “take much less risk than they used to”… We’ll pause for the obligatory golf clap. 


Goldman Warns Of A Default Wave As $1.3 Trillion In Debt Is Set To Mature


The lenders for the Bomgar deal included Jefferies Financial Group Inc. and Golub Capital BDC Inc., names that are outside the reach of the Fed. The company itself used the astounding defense that its pro forma leverage may only be “about seven times earnings”, which for some reason they seem to think is manageable, despite it obviously being an aggressive amount of leverage.

And since lenders may not ultimately wind up being the ones that pay the piper in the case of a default, the standards are lax on all sides. These types of loans are generally either bought by mutual funds or sometimes packaged into other securities that are sold to investors.

Of course, the harder that regulators squeeze to try to prevent these types of loans, the quicker that the market slips past them evolves. Trying to tighten loan standards has instead resulted in the market shifting to less regulated lenders, including companies like KKR & Co., Jefferies and Nomura. Hedge funds are next.

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The history of regulating leveraged loans goes back to 2013, when the Fed and the Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. issued guidance that told banks what acceptable leverage was. It restricted traditional banks from participating in the riskiest of these deals. Jerome Powell in 2015 said that this type of regulation would stop “a return to pre-crisis conditions”. Yes, the same Jerome Powell who today doesn’t see any risk. 

Of course, Wall Street lobbied against this back then, as did Republican lawmakers, declaring it as an overreach of regulation. And so now that the market has evolved in its wake, the leveraged loan market has started to run amok again.

Joseph Otting, the former banker who leads the Office of the Comptroller of the Currency is quoted as stating in February that: “…institutions should have the right to do the leveraged lending they want as long as they have the capital and personnel to manage that.”

Trying to put a favorable spin on current events, Richard Taft, the OCC’s deputy comptroller for credit risk, stated this month: “There isn’t anything going on in the market right now that would cause us to increase our supervision of that because we are always looking at that type of portfolio.”

Increased demand also means that yields won’t rise much even though loan quality has gotten worse. Investors may not be compensated for the risk that they’re taking, as we pointed out recently. We quoted Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC, who stated: “It’s not a good time to be buying bank loans”.

He also noted something troubling which we have discussed on numerous prior occasions: the collapse in lender protections which are worse than usual as there’s a smaller pool of creditors to absorb losses, and as covenant protection has never been weaker.

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Source: ZeroHedge

Why Were So Many Chinese Company Stocks Suspended? – Bank loans against stocks

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At least 1,331 companies have halted trading on China’s mainland exchanges, freezing $2.6 trillion of shares, or about 40 percent of the country’s market value, Bloomberg News reports today.

The Shanghai Composite Index has fallen 5.9 percent on Wednesday, July 8th, 2015. It was about 32 percent below the peak of 5,166 it reached on June 12. The unwinding of margin loans is adding fuel to the fire. Individual investors, we all know by now, have used generous margin financing terms to enter the stock market and then build up their portfolios. Less known is that Chinese companies have been doing the exact same thing by using their own corporate stock to secure loans from banks.

This means that they stood to lose a lot when those share prices start trending dramatically lower. 

Says Nick Lawson at Deutsche Bank: “Stocks are being suspended by the companies themselves because many have bank loans backed by shares which the banks themselves may want to liquidate, joining the queues of margin sellers.”

Nomura analysts add that: “Some bank loans have been extended with shares of listed companies put up as collateral.”

Numbers here are sketchy, but the team at Nomura estimate that the total amount of such loans may be 500-600 billion yuan ($80 billion – $96 billion), which sounds like a lot but is equivalent to about 1 percent of total loans to Chinese enterprises.

Still, the dynamic now at play is reminiscent of the troubles encountered by U.S. energy firms thanks to the plunging price of oil. Many shale explorers have bank loans tied to the value of their oil and gas reserves. When the price of oil began sinking last year, those credit lines were generally reassessed at a lower value, limiting the amount of credit available to the energy companies and creating further pressure for firms that were already dealing with the fallout from dramatically lower crude prices.

The easiest way to stop a painful cycle of lower share prices leading to curbed corporate credit, further troubles for Chinese companies and then ever-increasing share price pressures is to halt stock trading altogether.

Speaking of which, the latest move from Chinese regulators announced on Wednesday bans corporate executives from selling stock for six months.

Source: Bloomberg

This vicious circle described above also explains why China’s central bank has quickly moved to support the market in an effort to limit its impact on the wider economy. 

by Tracy Alloway for Bloomberg Business News

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