An Accident Waiting to Happen: The $1 Trillion Leveraged Loan Market

[marmar]

from Naked Capitalism:


An Accident Waiting to Happen: The $1 Trillion Leveraged Loan Market
Posted on September 19, 2014 by Yves Smith


A new article in Bloomberg gives a well-researched overview of a mess-in-the-making that regulators are choosing to ignore: the leveraged loan market. For newbies, “leveraged loans” means “risky loans to big companies”. For the most part, they fund private equity buyouts and restructurings. The juicy fees on these financings, 1% to 5% of the amount raised, versus an average of 1.3% for junk bonds, is a big reason why none of the incumbents is particularly eager to change a market that is working just fine for them in its current, creaky form.

The problems with leveraged loans are twofold. The first is that they are in the stone ages from an operational standpoint. It takes an average of 20 days to settle a leveraged loan, up from just under 18 days in the last leveraged loan boom, the eve of the financial crisis in 2007. That contrasts with 3 days or fewer for junk bonds. When investors buy new loan participations, the delays can extend into months since investors make binding commitments to fund the loan but the underlying acquisition can be held up. That also means if interest rates rise between the time of commitment versus when the transaction settles, investors are stuck with having to fund a deal at a rate that is now below market, leaving them in a loss position on a mark-to-market basis from the get-go.

And get a load of this:

While buyers and sellers can trade stocks and bonds among themselves, they need the approval of corporate borrowers before they can exchange loans. Clerks must then update loan documents to reflect new lenders.

With loans, “there’s a high amount of faxing going on still,” said Virginie O’Shea, a senior analyst at Aite Group LLC in London. “People don’t realize that fax machines are still around in this day and age but they are.”

This primitive state of affairs results from the fact that loans are not securities and thus are not subject to the tender ministrations of the SEC, including its rules on settlement. And the Fed and OCC have politely not taken any apparent interest in this market. ...................(more)

The complete piece is at: http://www.nakedcapitalism.com/2014/09/accident-waiting-happen-1-trillion-leveraged-loan-market.html

[L0oniX]

1. I expect another melt down soon. Looks like bubble, smells like bubble, tastes like bubble...

you know the rest of it.

[Jackpine Radical]

2. Yes, and "accident waiting to happen" be damned.

What they have in mind is a deliberate demolition, which will undoubtedly result in another round of bailouts and bonuses for the Too Big to Jail.

[L0oniX]

3. Perfect time for a national revolt.

[Jackpine Radical]

4. No fuckin' shit.