As Fed Tightens, Investors Give Up Crisis-Era Rate Protection
- Most new loans omit safeguards against rates falling to zero
- Fed cuts are seen as a distant risk amid tightening cycle
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U.S. corporate lenders are giving up safeguards that protect them from short-term interest rates falling close to zero, a step that could haunt them when the economy sours.
Almost 70 percent of loans to junk-rated companies made in the second quarter were missing a key protection known as a Libor floor, according to data compiled by Bloomberg. The provision is designed to ensure that investors don’t lose too much of their interest income when Libor falls below a pre-defined level, often 1 percent. In the first quarter, around 58 percent of leveraged loans didn’t have that safeguard, while two years earlier, just about all had it.