New York Times: Federal Reserve Warns as Risky Corporate Debt Exceeds Peak Crisis Level

Article by Jeanna Smialek in The New York Times

Companies with large amounts of debt are borrowing more money at a breakneck pace, prompting the Federal Reserve to flag the trend as one potential risk in the financial system.

Loans to companies with large amounts of outstanding debt — known as leveraged lending — grew by 20 percent in 2018 to $1.1 trillion, according to the Fed’s twice-annual Financial Stability Report. The share of new, large loans going to the comparatively risky borrowers now exceeds peak levels reached previously in 2007.

The loans are either held by mutual funds, which pool money from many different investors, or are grouped together and used to back securities called collateralized loan obligations. Those are sold to banks, mutual funds and other investors — with asset managers, insurance companies and hedge funds claiming the riskiest slices.

Ballooning levels of risky corporate debt may seem to have parallels to the mortgage-backed security boom that helped fuel the 2008 financial crisis, but the Fed report said the situations are different. The Fed said the collateralized loan obligations are structured in a more secure way than their housing-backed relatives, and banks should be able to handle their exposure to corporate debt.

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