Nonbanks account for 90 percent of US ‘leveraged loans,’ increasing run risk, IMF says

16 April 2019 9:37pm
Nonbanks such as hedge funds, private equity firms and mutual funds have come to account for just over 90 percent of US loans to highly indebted companies, increasing the risk that investor redemptions could aggravate a crisis, an International Monetary Fund report said.

These nonbanks’ share of so-called leveraged loans has increased from around 70 percent of the US market in 2009, and a little over 30 percent two decades ago, the IMF said in its Global Financial Stability Report last week. The remainder was accounted for by banks and securities firms.

“Greater participation of investment funds in the leveraged loan market means that a flood of investor redemptions could lead to additional market stress,” the 106-page report said.

The loans, usually arranged by banks, are often extended to individual companies and then bundled into securities called “collateralized loan obligations” for sale to institutional investors. Looser underwriting standards on the loans have increased their risk to investors, the semi-annual report said.