9.2 C
New York
Thursday, March 28, 2024

Debt Market Suffering “Quiet Meltdown” As Billions In Loans Are Suddenly Crashing

Courtesy of ZeroHedge

The exponential growth in the leveraged loan market, in the last several years, created an enormous excess accumulation of sub-investment grade loans that are a ticking time bomb when the next recession strikes.

Late last year, leveraged loan markets froze, for at least a month, as Treasury yields dropped, due to the increasing threat of a global recession. An abundance of fake trade news and central bank easing throughout 2019 saved Wall Street and reopened the leveraged loan market earlier in the year, but it seems that cracks are starting to develop again with recession threats building for 2020

Bloomberg reports that 50 companies that have at least $40 billion of loans have lost about ten percentage points of face value in the last three months. 

An exodus of investors has been seen in the leveraged loan market late-summer into early fall as liquidity dries up. It’s mostly due to Treasury yields sinking, and end of cycle fears increasing, as a recession could emerge next year.

Some of the hardest-hit companies in the loan space in the last three months have been Amneal Pharmaceuticals, whose $2.7 billion loan due 2025 plunged about 80 cents on the dollar, and Seadrill Operating whose $2.6 billion loan maturing in 2021 only commands 53 cents on the dollar, said Bloomberg. 

In terms of losses, Bloomberg data shows Deluxe Entertainment Services Group has seen more than $600 million wiped out in its first lien loan that dropped 77 cents in the last three months to 12.5 cents.

Although $40 billion is a blip versus the $1.2 trillion leveraged loan market, it indeed points to a quiet meltdown developing.  

“People want the well-performing loans, and are more wary of taking chances on the situations that have turned negative,” said Andrew Sveen, co-director of loans at Eaton Vance Management.

One of the hardest-hit sectors in the loan market is energy, with $12 billion of loans falling more than ten cents on the dollar. Consumer and health care sectors are next, with collectively $13 billion in loans outstanding that are starting to become distressed. 

The deterioration of underwriting standards in the loan market has allowed companies who are susceptible to credit downgrades when the economy slows to obtain loans.

But that ‘ease of underwriting’ is a two-edged sword as the current weakness, prompting downgrades, will force managers to sell loans into already illiquid markets, since their portfolios (or CLOs in many cases) can’t hold these investments because of certain rating thresholds. 

The leveraged loan market is therefore comparable to the subprime mortgage market a decade ago. It’s a significant imbalance that will be corrected in the next recession and will amplify the next downturn.

With cracks developing in the loan space, the current meltdown is going unrecognized by most of Wall Street (which didn’t end well in 2008 or 2015 for stocks).

The accumulation of excessive leverage and high exposure to loans of non-financial companies adds to the uncertainties that corporate America, as highly leveraged as it is, could see an epic implosion as the next recession could arrive as early as 2020.

Subscribe
Notify of
0 Comments
Inline Feedbacks
View all comments

Stay Connected

157,452FansLike
396,312FollowersFollow
2,280SubscribersSubscribe

Latest Articles

0
Would love your thoughts, please comment.x
()
x