Non-Banks Need To Be More Transparent About Their Leveraged Loans And Other High-Yield Exposures

As part of its role to monitor systemic risks around the world, the Financial Stability Board (FSB) today released its eighth annual global monitoring report on non-bank financial intermediation (NBFI). Of particular concern, the FSB report shows that global high-yield debt (also known as leveraged finance) markets, which consist of leveraged loans and high-yield bonds, have grown significantly since 2009 and presently exceed their pre-crisis highs. About $1.4 trillion in institutional leveraged loans, or loans purchased by institutional investors other than syndicate banks, was estimated to be outstanding globally as of October 2018. A big challenge, however, is that certain data and statistics (particularly those regarding the end-investors’ holding of leveraged loans) are not readily available; hence the FSB estimates based on a range of public and regulatory data. It is important to note, that if the amount that syndicate banks retain on their balance sheets (which includes revolving credit facilities, letters of credit and certain term loans) is taken into account, the outstanding amount of leveraged loans is even higher. According to the FSB report, “The total market size of leveraged loans is difficult to estimate given that: (i) leveraged loans are private, and therefore transaction data in some cases are not publically available (in particular for the middle market and direct lending segments, where leveraged loans typically are bilateral or not broadly syndicated); and (ii) commercially available data sources vary in methodology and coverage. This results in heterogeneous estimates of the leveraged loan market size, which may amount to as much as $2.2-2.4 trillion. These estimates would increase further if undrawn amounts, which are bank facilities approved but not yet accessed, are taken into account. In comparison, the estimated amount outstanding of global high-yield bonds is around $2.3 trillion.”