If there’s one thing senior bankers can agree upon, it’s that the next blow-up in global financial markets will be centred on the massive US leveraged loan market.
Some highly leveraged companies will be able to call on their investors – particularly if these are private equity sponsors – for extra equity which they can use to whittle down their debt burdens.But there will be limits to the extent to which private equity firms will be willing to bail out troubled portfolio companies.
, have opted to park the loans on their balance sheet to avoid selling at a hefty loss.With banks becoming more wary, highly leveraged companies are increasingly turning to the $US1.5 trillion private credit industry for the fresh funding they desperately need to avoid default and messy bankruptcies.
In addition, private credit providers are increasingly forging alliances with insurance companies that are sitting on hundreds of billions of dollars they need to invest in investment-grade debt.Not surprisingly, interest rates on private loans are expensive – often private credit loans charge a margin of 5 to 7 percentage points above benchmark interest rates, compared with 4 to 4.5 percentage points for bank loans.