U.S. regulators are monitoring how risk in the $1.2 trillion leveraged loan market is evolving and its potential impact on the U.S. economy, Reuters reported. Years of low interest rates coupled with increasing demand from investors for floating-rate loans allowed companies to borrow cheaply on looser documents, leading to outcries from Senator Elizabeth Warren (D), former Federal Reserve (Fed) Chair Janet Yellen and Mark Carney, Governor of the Bank of England. Warren, a Democrat running for President, wrote to regulators last November asking about their plans to address “growing risks” in the leveraged loan market, comparing the asset class to the pre-2008 subprime mortgage market, which contributed to the financial crisis. The Fed, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corp (FDIC) responded to Warren in a February 25 letter that was not issued publicly, acknowledging her concerns about the growth in leveraged lending, which has led to weaker lender protections. “Agency examiners have observed in some transactions fewer and less stringent protective covenants, more liberal repayment terms, and incremental debt provisions that allow for increased debt that may inhibit deleveraging capacity and dilute repayment to senior secured creditors,” Comptroller of the Currency Joseph Otting, Fed Chair Jerome Powell and FDIC Chair Jelena McWilliams wrote in the letter.
