“7 Factors That Could Tank Markets in 2019”
October 16, 2019
“…Most investors are not even aware of the full extent to which the leveraged loan markets are threatening the general economy. In fact, most investors might not even know what a “leveraged loan is.
A leveraged loan is a loan issued to corporations that already have outstanding debt, and on top of that, a poor credit history.
Over the last six years, the leveraged loan market has ballooned to a $1.2 Trillion market. $140 billion are being held by retail investors.
Leveraged loans were attractive to investors seeking high yield and floating interest rates (tied to LIBOR) in a low-interest environment.
The problem is that the original investor protections they once held–called “covenants”–are no longer there, as companies shifted toward a “covenant-lite” structure.
To make matters worse, 80% of all leveraged loans today are “covenant-lite,” meaning that the entire leveraged loan market is made up of high-risk assets that can blow up at any time.
The Fed noted this in their September FOMC meeting, stating that leveraged loans may pose as a systemic threat to “financial stability.”
But what can really tank the economy is the fact that these loans are packaged into ETFs, Mutual Funds, and various other instruments.
Financial institutions have turned these high-risk loans into Collateralized Loan Obligations (CLOs), not unlike the Collateralized Debt Obligations that blew up the global financial system in 2008…”
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