Report: Almost $270 Billion in Leveraged Loans at Default Risk

Leveraged loans were a popular method of financing during the pandemic.

Now, with interest rates set to stay high, they’ve turned into a major headache, The Wall Street Journal reported Wednesday (Sept. 27).

According to that report — which cites the ratings firm Fitch — close to $270 billion of leveraged loans have weak credit profiles and carry a default risk.

The WSJ noted that conditions have worsened as the Fed has hiked rates. Aside from a jump in 2020, the rate for loan defaults in the last 12 months is the highest in nine years.

James St. Aubin, chief investment officer at Sierra Mutual Funds, told the newspaper that leveraged loans’ gains could come apart if the Fed’s rate tightening causes an economic downturn and triggers a wave of defaults.

“The asset I’m worried about most is bank loans,” he said

The news comes nearly two months after reports that banks in the U.S reported a $18.9 billion loan-loss rate, the highest in three years, coming amid a storm of defaults among credit card users and commercial real estate borrowers.

Banks lost 61 cents on every $100 loaned out, the most since 2020 and the start of the pandemic. The rise in losses is being driven by higher interest rates, consumers exhausting savings and landlords failing to find tenants as people continue to work from home.

Gerard Cassidy, banking analyst at RBC Capital Markets, told the Financial Times the loan losses are a sign of a return to normality after the pandemic, when banks “became accustomed to very strong quality.”

As noted here in July, a little more than half the banks in the U.S. have tightened the terms for commercial and industrial loans.

“Drill down a bit, and the banks are also looking to tighten standards through at least the rest of the year,” PYMNTS wrote. “Perhaps no surprise, the respondents cited a ‘less favorable’ and ‘more uncertain’ economic outlook as key considerations in tightening those standards. The banks also cited a deterioration in their own liquidity positions.”