May 7, 2019

The Fed is sounding the alarm on leveraged loans

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

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What a post-pandemic space industry might look like

Illustration: Aïda Amer/Axios

The economic downturn caused by the coronavirus pandemic could spell major trouble for dozens of small companies working to break into the space industry.

The big picture: SpaceX, United Launch Alliance and other companies are well-established with strong customer bases and robust portfolios, but the prospects for the industry's growth hinge on smaller companies.

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Trump removes watchdog overseeing rollout of $2 trillion coronavirus bill

Glenn Fine, acting Pentagon watchdog

President Trump on Monday replaced the Pentagon's acting Inspector General Glenn Fine, who had been selected to chair the panel overseeing the rollout of the $2 trillion coronavirus relief bill passed last month, Politico first reported.

Why it matters: A group of independent federal watchdogs selected Fine to lead the Pandemic Response Accountability Committee, but Fine's removal from his Pentagon job prevents from being able to serve in that position — since the law only allows sitting inspectors general to fill the role.

Coronavirus dashboard

Illustration: Sarah Grillo/Axios

  1. Global: Total confirmed cases as of 12 p.m. ET: 1,365,004— Total deaths: 76,507 — Total recoveries: 292,467Map.
  2. U.S.: Total confirmed cases as of 12 p.m. ET: 369,069 — Total deaths: 11,018 — Total recoveries: 20,003Map.
  3. Trump administration latest: Peter Navarro warned White House colleagues in late January about the massive potential risks from the coronavirus.
  4. Federal government latest: The public wants the federal government, not states, in charge of coronavirus — Testing capacity is still lagging far enough behind demand.
  5. States update: New York death toll surged to its highest one-day total as state predicts a plateau in hospitalizations.
  6. 2020 update: Wisconsin Supreme Court blocks the governor's attempt to delay in-person primary voting until June.
  7. What should I do? Pets, moving and personal health. Answers about the virus from Axios expertsWhat to know about social distancingQ&A: Minimizing your coronavirus risk.
  8. Other resources: CDC on how to avoid the virus, what to do if you get it.

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