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Economics

Leveraged Loans Loom Large

While subprime mortgages continue to cause pain for many major financial institutions, banks face problems in other parts of their business

For many banks, leveraged loans remain an issue. Not only has the value of these loans declined, banks are finding it difficult to unload the debt onto third parties. While this is a relatively small asset class compared with collateralized debt obligations (CDO), which have been a key component of the credit dilemma, they nevertheless represent another facet of the ongoing turmoil in the financial markets.

Leveraged loans are made to non-investment grade corporations. During the leveraged buyout boom of 2005, 2006, and early 2007, many banks were willing to lend money to companies going private at low interest rates, since corporate default rates among non-investment grade companies remained at historically low levels. But as this crisis has dragged on, and as the strength of the U.S. economy has deteriorated, it has become harder for some of these heavily leveraged companies to meet their obligations.