Markets

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

Regulators are notorious for falling behind the financial industry, cracking down on risk in one area only to watch it move swiftly beyond their reach.

This phenomenon has rearranged the competitive landscape in the nearly $1 trillion market for U.S. leveraged loans. This week, Bloomberg News highlighted how private-equity firms have been winning a growing number of assignments to help companies secure risky loans from investors.

Indeed, the likes of KKR, Ares Capital and Angelo Gordon have climbed the league tables, managing loan syndications for companies such as Ancestry.com and Ultimate Fighting Championship.

But they're not alone. Many other smaller firms, including regional banks, have also grabbed leveraged-loan banking business from Wall Street in the past few years as federal regulators crack down on lending practices at the biggest banks. 

Losing Dominance
Wall Street's largest banks have become less dominant over leveraged-loan banking in recent years
Source: Bloomberg

A record 127 firms won underwriting assignments for U.S. leveraged loans last year. That's up from 120 in 2015 and 109 the year before, according to data compiled by Bloomberg.

Banking Balloon
The number of banks involved in leveraged-loan sales has ballooned in recent years
Source: Bloomberg

This contrasts with other parts of the banking industry, such as underwriting corporate bonds, where the pool of participating firms has been shrinking.

This matters considerably to investment banks because they once earned hundreds of millions of dollars from managing these risky loan sales. And it's important to all those competitors, from Nomura and Jefferies to KKR and Ares Capital Corp., which are winning market share. Perhaps just as important, it's going to matter to regulators, whose best intentions are pushing these loans into murkier territory. 

Private-equity firms have won these lucrative assignments by using their own money to lend while also bringing in other investors. Bigger banks can't do this as easily because of higher capital requirements.  The largest U.S. institutions must also comply with new leveraged-lending guidelines, aimed at reducing the creation of overly risky loans, or else face reprimands or fines. For example, regulators dinged several big banks for a $1.15 billion loan they helped arrange for Uber Technologies, according to a Reuters report on Tuesday.

Smaller or foreign banks have won assignments from bigger U.S. rivals simply because they didn't have to follow the same rules. Investors are clearly willing to take bigger risks than regulators would like, and plenty of firms are ready to accommodate them. 

It's noble that regulators want to reduce the creation of ultra-risky loans. But when there's a will, there's a way, especially if there's money to be made. They're going to need a brighter flashlight if they want to peer into the corners they have created. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lisa Abramowicz in New York at labramowicz@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net