The boom in the market for leveraged loans, a favorite financing source of private-equity-backed companies, has created vulnerabilities in the global financial system, according to a report from international regulators, the Wall Street Journal reported. A limited number of big banks are most exposed to these markets because they arrange the loans and hold some of them while also offering borrowers revolving credit facilities, according to the Financial Stability Board, a collection of global central-bank officials. The same banks also arrange and underwrite the creation of structured investment funds known as collateralized loan obligations (CLOs). The market for leveraged loans has grown rapidly in recent years, supported by the creation of CLOs, and may range in size from $1.4 trillion to $3.2 trillion globally, depending on the types of lending included. CLOs have boomed again as investors hungry for yield have returned to a kind of investment that was last popular in the run-up to the 2008 credit crisis. Banks globally had almost $1.4 trillion of loans and revolving credit facilities to these riskier borrowers at the end of 2018, much of which hadn’t been drawn down, according to the FSB. On top of that, banks had almost $340 billion of exposure to loans and CLOs at the end of 2018, some of which are meant to be held only temporarily. The FSB identified the holders of 79 percent of leveraged loans and 86 percent of CLOs, but said little was known about the exposure of certain nonbank investors to these markets.
