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Leveraged Loans Worry Investors as Asset Values Sink

January 04, 2019, 08:19 AM
Filed Under: Industry News

The $1.3 trillion leveraged loan market is facing a shakeup as investors begin to lose faith in the value of the assets used to back the large debt facilities that many large yet struggling companies use to finance operations and growth, Bloomberg reports.

“Collateral is a big long-term risk,” Chris Mawn, head of the corporate loan business at investment manager CarVal Investors, told Bloomberg. “You think you’re secured by a Cadillac, but three years from now, it turns out you’ve got a Chevy.”

The report noted that the leveraged loan market faced tightened margins in December, with experts blaming so-called covenant-lite terms that have become popular over the past several years as competition in the market has increased and it has become flooded with more private capital.

“The loose contract provisions that money managers have agreed to over the last two years mean that when borrowers actually do start going under en masse, creditors are likely to end up with fewer assets to liquidate, and ultimately bigger losses," writes Bloomberg. Private equity-backed firms have generally been the most aggressive borrowers when it comes to pushing for the right to move around collateral.”

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