Bank of America has recently warned that leverage loans can impact the stable U.S. economy.
BoA CEO Brian Moynihan said that the problems from this kind of loan are not yet evident as the country’s economic expansion continues and companies reap profits. But he said that the leverage finance could emerge into an issue in the broader market, particularly when the economy slows down.
Moynihan warns of a “carnage” if companies with leveraged loans cannot manage and restructure their debts when economic activities slow down.
The bank is the leader in U.S. leverage loans for the tenth year, according to Bloomberg. It has limited exposure to collateralized debt obligations, which many economists believe played an enormous role in the 2008 financial crisis.
U.S. companies with weaker credit ratings, such as Uber and Burger King, were among the ones taking leveraged loans. These companies are used to fund their deals. However, these agreements, known as leveraged buyouts, can get problematic because of their significant debt load.
The U.S. has combined outstanding leveraged loans of about $1.15 trillion — which is double the level reached five years ago. Increasingly, these loans are being made with less protection for investors and lenders.
US regulators have been monitoring the evolving risk of the leveraged loan market and its likely impact on the country’s economy.
Low-interest rates running for years coupled with growing demand from investors for floating-rate loans enabled companies to borrow at cheaper rates on looser documents. This issue has led to outcries from politicians such as Sen. Elizabeth Warren, former Federal Reserve Chair Janet Yellen, and Mark Carney, the Governor of the Bank of England.
Warren, a Democrat vying for U.S. presidency, wrote to regulators last November asking about their plans to deal with the “growing risks” in the leveraged loan market.
The Fed, Federal Deposit Insurance Corp (FDIC), and the Office of the Comptroller of the Currency (OCC) responded to Warren, confirming her concerns about the growth in leveraged lending that has resulted in weaker lender protections.