The risk debts of non-financial companies in the US reached $ 2.7 trillion and demonstrates “eerie similarities” with subprime mortgage loans, which triggered the financial crisis ten years ago, Moody’s warned in the survey, dated August 23.
Mark Zandi, chief economist at Moody’s Analytics, pays attention to am “eerie” similarity between subprime mortgages that led to the financial crisis in the US in 2007-2008 (and, ultimately, the global economic downturn), and the current market for risky loans leveraged loans and junk bonds.
Leveraged loans are loans that are already given to highly accredited non-financial businesses. Typically, these loans are provided at a floating interest rate tied to Libor (i.e. the cost of their service is growing against the background of a general increase in rates in the economy). They have junkratings from credit rating agencies. Borrowing companies use these loans to finance mergers and acquisitions, dividend payments, buybacks of their own shares, refinancing debts.
This is the most serious emerging threat to the current business cycle, Zandi warns. The volume of these risky loans in the US, according to Moody’s, reached a record $ 1.4 trillion, and coupled with junk corporate bonds is about $ 2.7 trillion. “And now notice that the debts on subprime mortgages were close to $ 3 trillion at its peak before the financial crisis [of 2008],” the economist cautions.
At the same time, as in the 2000s, which preceded the financial crisis, when subprime mortgages were aggressively securitized, the current risk loans are also repackaged into collateralized loan obligations (CLO), which are offered to global investors. According to Moody’s Analytics, about half of leveraged loans are packaged in CLO, that is, about $ 550 billion worth of such bonds.
The share of subprime mortgages in the US, which was significantly overdue (90 days or more), rose to 21% by mid-2008, compared to 5.6% in mid-2005, according to the US Federal Reserve . As of July 2018, about 3.4% of “junk” corporate debt in the US was in default, according to Moody’s. The quality of such loans has significantly deteriorated in recent years as banks are softening credit standards, most of the new leveraged loans are issued without covenants (financial constraints that borrowers are required to observe), CNBC said.
Zandy summarizes: “It is much too early to conclude that nonfinancial businesses will end the current cycle in the way subprime mortgage borrowers did the previous one. Even so, while there are significant differences between leveraged lending and subprime mortgage lending, the similarities are eerie,” Moody’s chief analyst cautions.