This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

The Deal: Leveraged Loans Are Being Issued Like It's 2007

NEW YORK ( The Deal) -- If happiness is health and a short memory, no wonder the debt markets are so happy.

A healthy economy and a lowered default rate have led to a record issuance of leveraged loans, which hearkens back to the good old or bad old -- depending on perspective -- days of 2007, not long before credit markets seized up.

Through the third quarter of this year, total loan volume is $515 billion, according to a JPMorgan report. That compares to the prior record of 2007, when the total for the entire year was $388 billion.

September alone hit $45.8 billion on the back of two of the biggest leveraged loans ever: Hilton Worldwide Holdings and Dell (DELL) with both breaking the $7 billion mark. These two deals, along with a $9.5 billion loan package backing H.J. Heinz Co.'s $28 billion buyout, represented the first time loans have reached pre-crisis levels. No loans above $6 billion had been issued since 2007, according to Standard & Poor's Leveraged Commentary & Data

Happy debt markets indeed. However, for investors with memories of the great recession, perhaps not so happy. Less than three years after prior record loan volumes hit the books, the default rate on corporate leveraged loans also hit its own all-time high, topping out at around 14% in 2009. This was even higher than the bond default rate, which traditionally had been higher than that for loans.

Coincidentally, the loan default rate hit a three-year high during the third quarter of 2013, climbing to 1.94% from 1.79%, the highest it has been since November 2010 when it was at 2.18%.

While these numbers are still low from a historical perspective, investors would be permitted to worry whether history was about to repeat itself.

But this time may be different, particularly because there has been a big change in leverage ratio.

"I don't think that volume itself is indicative of there being a greater risk of default," says Patrick Ryan, head of the banking and credit practice at Simpson Thacher & Bartlett. "In addition, leverage levels haven't returned to the multiples you were seeing in 2006 and 2007."
1 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
DELL $0.00 0.00%
AAPL $126.44 0.00%
FB $87.28 0.00%
GOOG $523.40 0.00%
TSLA $280.02 0.00%

Markets

DOW 17,730.11 -27.80 -0.16%
S&P 500 2,076.78 -0.64 -0.03%
NASDAQ 5,009.2140 -3.9090 -0.08%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs