1/2/2023 0 Comments Turmoil within the aub![]() ![]() In the lead-up to the 2008 financial crisis, banks were so keen to lend that they liberally handed out mortgages to customers with weak or no credit histories who ended up defaulting when times got tough. ![]() While he said it was hard to see the next financial crash coming directly from a failure in the leveraged loan market, Saleuddin added that there was a chance that “small changes in default rates in the loans or even in expectations of same could cause a meltdown”. ![]() “A quote wrongly attributed to Mark Twain fits here: history rarely repeats, but it does rhyme,” said Rasheed Saleuddin, a research associate at the University of Cambridge’s Judge Business School. ![]() The key question now is whether a bubble in a different corner of the debt market could trigger a market panic. “Given the decline in underwriting standards, investors in leveraged loans are at increasing risk of loss,” said the Bank. It said the “global leveraged loan market was larger than – and was growing as quickly as – the US sub-prime mortgage market had been in 2006”.Īs with the sub-prime crisis, the bank added, underwriting standards had slipped – in other words, risky corporate debt was too easy to get right now. In October last year the Bank’s financial policy committee, which monitors the health of the financial system, pointedly raised the spectre of the 2007-08 credit crunch. The Bank of England, Australia’s central bank, the International Monetary Fund and members of the US Federal Reserve have raised red flags over so-called leveraged loans, which are offered to companies already in debt but often come with few strings attached. A growing chorus of global leaders spent 2018 warning that the leveraged loan mountain was getting dangerously large and inviting comparisons with the financial crisis a decade ago. Henry McVey, who sits on the risk committee at KKR, said last week that the leveraged loan market – a $1.3tn (£1tn) pile of risky corporate loans – had been on a “great run in recent years” but the firm was now cutting its exposure to the asset class to zero. W hen an expert in financial risk at one of the world’s most powerful private equity outfits tells investors to scale down their exposure to a specific corner of the debt market, it is worth taking notice. ![]()
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