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PeanutButter

The sub-prime timebomb is back – this time companies are lighting the fuse

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https://www.theguardian.com/business/2019/jan/12/subprime-timebomb-back-companies-lighting-the-fuse

When an expert in financial risk at one of the world’s most powerful private equity outfits tells investors to scale down their exposure to a specific corner of the debt market, it is worth taking notice. 

Henry McVey, who sits on the risk committee at KKR, said last week that the leveraged loan market – a $1.3tn (£1tn) pile of risky corporate loans – had been on a “great run in recent years” but the firm was now cutting its exposure to the asset class to zero.

McVey is not alone in his caution. A growing chorus of global leaders spent 2018 warning that the leveraged loan mountain was getting dangerously large and inviting comparisons with the financial crisis a decade ago.

What’s all this then? 

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29 minutes ago, PeanutButter said:

https://www.theguardian.com/business/2019/jan/12/subprime-timebomb-back-companies-lighting-the-fuse

When an expert in financial risk at one of the world’s most powerful private equity outfits tells investors to scale down their exposure to a specific corner of the debt market, it is worth taking notice. 

Henry McVey, who sits on the risk committee at KKR, said last week that the leveraged loan market – a $1.3tn (£1tn) pile of risky corporate loans – had been on a “great run in recent years” but the firm was now cutting its exposure to the asset class to zero.

McVey is not alone in his caution. A growing chorus of global leaders spent 2018 warning that the leveraged loan mountain was getting dangerously large and inviting comparisons with the financial crisis a decade ago.

What’s all this then? 

Whats all this? 

Very confused is what it is.

Subprime relates to consumer mortgages where the borrowers Fico score prevents their bank using freddie or fannie mac pool to offliad the debt.

Corporate loans relate to companies selling debt.

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50 minutes ago, PeanutButter said:

https://www.theguardian.com/business/2019/jan/12/subprime-timebomb-back-companies-lighting-the-fuse

When an expert in financial risk at one of the world’s most powerful private equity outfits tells investors to scale down their exposure to a specific corner of the debt market, it is worth taking notice. 

Henry McVey, who sits on the risk committee at KKR, said last week that the leveraged loan market – a $1.3tn (£1tn) pile of risky corporate loans – had been on a “great run in recent years” but the firm was now cutting its exposure to the asset class to zero.

McVey is not alone in his caution. A growing chorus of global leaders spent 2018 warning that the leveraged loan mountain was getting dangerously large and inviting comparisons with the financial crisis a decade ago.

What’s all this then? 

 

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Leveraged loans are loans most usually used to finance the acquisition of a company (either by another company or private equity fund).

For instance - if I wanted to acquire EC PLC for £100m I might borrow £65m from a bank or debt fund (or syndicate thereof) and then partner with a private equity fund for the remaining £35m.

A crude measure of the riskiness of a leveraged loan is the ratio of the loan (plus any debt that has to be repaid before the loan can be repaid) to the target company's EBITDA.  These ratios have been rising over the last few years while at the same time the protections in those loans enabling the lenders to take early action to protect their positions have been watered down - remember that the GFC was over 10 years ago, many people now making these loans were making the coffee or in university in 2008, and anyway it's different this time, innit?

If corporate performance goes backwards the loans that were made most recently (ie. on the riskiest terms) are likely to be the ones that start smelling bad first.  Hence KKR don't want to play anymore.

This does not necessarily imply that GFC2 is on the way.  That will depend how heavily the clearing banks (which are systematically important) have been playing in this market.  A large part of this market is made up of funds acting on behalf of pension funds, endowments, sovereign wealth funds etc. If non Bank actors lose their shirt it won't have a global effect (it may of course affect your pension fund if it was one of the underlying funders).

Edited by Exiled Canadian

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Beat me to it posting this.

Yes, CLOs sound very much like CDOs.

Of course, the banks don't care, they issue covenant-light loans to weak companies, chop up the loans into bundles and resell as triple AAA tranches or whatever.

I think we are about to see 2009 all over again, maybe this time with negative interest rates for real.

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11 hours ago, Exiled Canadian said:

.

This does not necessarily imply that GFC2 is on the way.  That will depend how heavily the clearing banks (which are systematically important) have been playing in this market.  A large part of this market is made up of funds acting on behalf of pension funds, endowments, sovereign wealth funds etc. If non Bank actors lose their shirt it won't have a global effect (it may of course affect your pension fund if it was one of the underlying funders).

The whole problem of the credit crunch was, being global, the Keynesian response was overwhelming and led to higher house prices.

A more localised crisis may be more bearish for house prices.

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4 hours ago, Si1 said:

The whole problem of the credit crunch was, being global, the Keynesian response was overwhelming and led to higher house prices.

A more localised crisis may be more bearish for house prices.

I wonder if they will ever get around to starting the first day of repairing the Financial crisis of 2008 or will events do the work for them at some point, or do some people really think that we were saved in the few post years later?

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10 hours ago, Freezer? Best place for it said:

How do you "slash" up to 10%?  Isn't that single figures?

That's journalese for we don't know the exact number but we've heard it's about 10%.

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  • 295 Brexit, House prices and Summer 2020

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