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Fitch: Aggressive Leveraged Finance Market Not Reminiscent of 2006-2007 Peak

June 11, 2013, 07:43 AM
Filed Under: Industry News

The ongoing increase in leverage finance issuance and other related factors do not indicate that a return to the leveraged buyout (LBO) boom days of 2006-07 is likely, according to a new Fitch Ratings report.

Fitch's report, 'U.S. Leveraged Finance and the Credit Cycle: Do Signs Point to a Return to the 'LBO Boom' Days?', evaluates certain risk indicators present in today's market versus those that were present during the peak of the last credit cycle of 2006-2007.

The rapid increase in loan issuance levels, especially covenant-lite loans, and more aggressive tone in the market over the last year have many concerned the loan market is rapidly returning to the pre-crisis time period. Fitch notes that increased levels of financial risk have largely been driven by the scarcity of yield in the credit markets. Fitch believes that absolute issuance totals provide little guidance in defining the level of risk in the market today.

Among the many distinct drivers that define a credit cycle, Fitch focused on three differentiating factors between today's market and the peak of the last cycle: new transaction quality, use of proceeds, and current corporate operating performance. Fitch also examined a number of secondary factors, which helped define the peak of the last credit cycle, including: covenant-lite issuance, market and investor leverage, and leveraged buyout issuance.

Based on evaluation of these factors, Fitch does not believe the more aggressive tone over the last year is comparable to the peak of the last credit cycle in 2006-2007. The current low interest rate environment and market demand for loans are currently distorting certain measures and metrics, making it appear the market has simply returned to the pre-crisis peak days.

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