Seeking Alpha

Feds warn on lending froth

  • Trying to see around corners, the Fed and the OCC have sent letters to banks asking them to cool it with stripping covenants out of leveraged loans. Speculative-grade borrowers have raised $239.5B in so-called covenant-light loans this year, more than double 2012's amount. Leveraged loans - bank loans to non-investment-grade borrowers - in total have summed to $839.6B, threatening to topple 2007's record of $899B.
  • "The concerns they are expressing are not something we are seeing reflected in an increasing default rate,” says Elliot Ganz from an industry group. "If the agencies prevent the banks from underwriting leveraged loans, it’s pretty clear that some deals won’t get done."
  • Leveraged loan funds - BKLN, SNLN, SRLN, FTSL - have been among the hotter ETF classes this year.
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