Sign up for our daily briefing
Make your busy days simpler with Axios AM/PM. Catch up on what's new and why it matters in just 5 minutes.
Stay on top of the latest market trends
Subscribe to Axios Markets for the latest market trends and economic insights. Sign up for free.
Sports news worthy of your time
Binge on the stats and stories that drive the sports world with Axios Sports. Sign up for free.
Tech news worthy of your time
Get our smart take on technology from the Valley and D.C. with Axios Login. Sign up for free.
Get the inside stories
Get an insider's guide to the new White House with Axios Sneak Peek. Sign up for free.
Catch up on coronavirus stories and special reports, curated by Mike Allen everyday
Catch up on coronavirus stories and special reports, curated by Mike Allen everyday
Want a daily digest of the top Denver news?
Get a daily digest of the most important stories affecting your hometown with Axios Denver
Want a daily digest of the top Des Moines news?
Get a daily digest of the most important stories affecting your hometown with Axios Des Moines
Want a daily digest of the top Twin Cities news?
Get a daily digest of the most important stories affecting your hometown with Axios Twin Cities
Want a daily digest of the top Tampa Bay news?
Get a daily digest of the most important stories affecting your hometown with Axios Tampa Bay
Want a daily digest of the top Charlotte news?
Get a daily digest of the most important stories affecting your hometown with Axios Charlotte
Illustration: Aïda Amer/Axios
The Fed might not be raising rates, but it is again warning about Corporate America's reliance on leveraged loans.
Why it matters: An economic slowdown could create a sharp spike in defaults, affecting not just individual companies but also mutual funds that hold bank debt or leveraged loans themselves.
Per the central bank's latest Financial Stability Report:
- Leveraged loans now stand at $1.15 trillion.
- That's represents a 20.1% increase during 2018, compared to an average growth rate of 15.8% between 1997 and 2018.
- The current total is larger than prior peaks in 2007 and 2014.
The big picture: It's not just the aggregate numbers that worry central bankers. It's also the continued weakening of leveraged lending standards and covenants. For example, the share of large loans with debt-to-EBITDA ratios above 6x is now higher than during prior peaks in 2007 and 2014. Moreover, a Moody's index tracking the strength of leveraged loan covenants is at its lowest level since the index launched in 2012 — including a substantial rise in cov-lite loans.
- The Fed acknowledges that leveraged loan credit performance has remained "solid" with low default rates,"in part reflecting the relatively strong economy." It also believes today's leveraged loan bundles are better structured than pre-crisis residential mortgage bundles.
The bottom line: That's a major contrast from 2008, in that the Fed in 2019 suggests these loans could create a severe bubble deflation rather than an all-out pop. But perhaps the biggest difference is that the Fed and others are actually sounding preemptive alarms. If things get messy this time, no one will be able to pretend they weren't warned.
Go deeper: The debt market is littered with risky loans