Comeback King: Junk Loans

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Dec. 23 (Bloomberg) -- Bloomberg's Su Keenan reports on junk loans and the unprecedented demand for floating-rate debt. She speaks with Alix Steel on Bloomberg Television's "Money Moves." (Source: Bloomberg)

Companies, is that what we are looking at here?

The real idea behind this, they are usually given to companies rated below investment grade.

2013 turned out to be a banner year.

We are seeing unprecedented demand, due in part to the expectation of rising interest rates ahead.

It shattered the previous 2008 record worthies by billions, and it was fueled by borrowing that did not include typical lender productions, and what is new this year is the investor demand.

They were the biggest losers in the fixed income and the idea that the fed would start unwinding its bond buyer made them big winners.

Investment inflows, people piling into mutual funds to buy junk loans.

According to banc of america, the assets grew to 85% this year.

It was also a big jump, accounting for over 200 billion dollars in loans.

These do not include maintenance requirements.

Finally, we sought even speculative companies step up issuance of this type of debt to pay shareholder dividends.

There is a lot of that going on.

A big surge in demand, for sure, but there does have to be something here.

I would think more junk loans perhaps means the underwriting process is not that regulated.

What are the underwriter saying about this?

They are starting to say a lot.

The worst deals are often made in the best of times.

That is a phrase you often see.

While it will remain low, ever more aggressive transactions, which are what we are seeing, become the seeds of the next default cycle, and regulators are already concerned about deteriorating underwriting practices, and they are asking banks to avoid originating loans that could be considered criticized or debt that would have deficiencies.

They identified that 42% of leveraged loans fit into this category.

Ok.

bottom line, will this surge in demand continue?

We have seen the market increased to a never seen before size.

There is a lot of benefits and a lot of caution out there.

This is especially as we expect the fed to taper next year.

Su keenan, thank you.

This text has been automatically generated. It may not be 100% accurate.

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