Investors’ Eyes Should Be On Leveraged Finance Markets

Finance Markets

In this environment of high inflation and uncertainty about the banking sector’s financial health, market participants should scrutinize U.S. leveraged finance markets carefully. This asset class, comprised of leveraged loans and high-yield bonds, is very sensitive to rising interest rates and current uncertainty about the direction of the banking sector. In 2022, leveraged loan issuance declined and default rates rose given rising interest rate pressures. Recent bank turmoil influenced leveraged loan underwriting volume to be at it lowest level since 2016.

U.S. Leveraged Markets Have Grown Significantly

According to Eric Rosenthal, Senior Director of Leveraged Finance at FitchRatings, the “leveraged loan universe is $1.68 trillion, and high yield bonds are at $1.33 trillion, also essentially unchanged from year-end 2022.” This over $3 trillion market has grown 100% since the 2007-2009 financial crisis. The leveraged loan market, alone, has grown about 130%.

The Majority of Leveraged Loans Are Covenant-Lite

The technology and healthcare/pharmaceutical sectors are the largest in amount outstanding of leveraged loans. About 85% of all leveraged loans are covenant-lite, which means that there is a lot less protection for holders of those bonds should issuers default; some sectors such as building and materials, chemicals, consumer products, food, beverage, and paper have 90% or more in covenant lite loans.