Leveraged loans

Direct lenders around the world are talking with borrowers about easing interest payments, waiving penalties and relaxing covenants as they assess the growing damage to their portfolios caused by the coronavirus pandemic.

The amount of distressed debt in the U.S. has quadrupled in less than a week to nearly $1 trillion, reaching levels not seen since 2008 as the collapse of oil prices and fallout from the coronavirus shutters entire industries across the globe.

Dramatic Fed intervention may steady some markets, but unless something changes — and, judging by the last two weeks, it very well could — the central bank won’t be there to save fallen angels. Which brave investors will step up?

Red flags and warning signs from February should have prompted investors to make “all the wise decisions" at that time, says Ville Talasmaki of Finnish financial group Sampo Oyj.

While collapsing market prices do not present immediate worries for CLO managers, the prospect of future downgrades and defaults becomes more problematic.

Prices for major term loans issued by operators such as Marriott International, Hilton Worldwide and Caesars Entertainment have fallen in recent weeks as investors grow worried about the impact of the COVID-19 outbreak on global tourist and business travel.

Banks may be protected from a direct hit, but they have invested in vehicles that include such loans, potentially exposing them to defaults.

Exchange traded funds tracking leveraged-loan performance saw sharp declines on Monday, following a Friday leveraged loan index decline that was the steepest in nearly a decade.

If JPMorgan, Credit Suisse and Macquarie Group aren’t able to find enough takers of bonds and loans funding El Dorado Resorts' acquisition of Caesar's Entertainment, they may have little choice but to offer the debt at a steep discount.

Regulators are alarmed about banks' rising exposure to high-risk corporate credits and want more data on how they would perform in a recession.