Banks Reportedly Further Reduce Offering of Leveraged Loans

American and European banks are reportedly reducing their already low offering of leveraged loans.

This move follows the recent takeover of Credit Suisse Group and the troubles among regional banks in the United States, Bloomberg reported Tuesday (March 21).

The change also comes at a time when the issuance of such loans was at its lowest point since 2015 in the United States and 2016 in Europe and had only just begun to recover, the report added.

Credit markets had begun to turn around, with some leveraged buyouts being announced in recent weeks, but the recent volatility has reinforced banks’ concerns about risky credits and their fears of a potential recession, per the report.

Leveraged loans’ trading prices have already lost half the gains they had made this year, according to the report.

“Issuance will remain light until concerns over financial sector deposit flows and liquidity ease,” UBS Head of Credit Strategy Matthew Mish told Bloomberg. “This should happen by mid-April at the latest as banks start reporting first-quarter earnings.”

Worldwide merger and acquisition (M&A) activity saw a record drop in the second half of 2022, the Financial Times reported Dec. 29.

The report attributed the plunge to global markets’ lower confidence and higher cost of financing, according to the report.

Tuesday’s Bloomberg report comes about two months after the Bank of England said that financial institutions should expect more scrutiny of their credit portfolios and that its examination of firms’ credit risk management will include traditionally higher risk areas, including leveraged lending.

“The operating environment for firms remains challenging,” the central bank wrote in a Jan. 10 letter to deposit takers. “The impact of increasing interest rates, inflation and high cost of living, geopolitical uncertainty and supply chain disruptions is expected to pose challenges to firms’ credit portfolios. Firms need to be ready for a prolonged period of stress.”

Beyond that, banks and lenders have been setting aside funds to cover loan losses out of fear of a recession.

For example, Capital One and American Express increased their rainy-day funds in an indication that they are anticipating an end to an era of high consumer spending and record low unemployment, The Wall Street Journal reported Jan. 30.