In an interview with the Financial Times, Larry Fink, the CEO of BlackRock, one of the world’s largest fund management groups, warns of burgeoning risk in the leveraged loan market, arguing it has the potential to go the way of subprimes, and urges the Fed to take interest.
Now this story has more significance than it might seem. Too many investors have been chasing yield, and the result has been that speculative credits, including borrowers that probably shouldn’t be funded at all, are getting loans on very generous terms. But the real news is that someone as prominent as Fink would point to dangers in a particular market. Remember, it’s not in his business interest to raise either investor or regulatory concerns. He must believe it is worth breaking some china in the interest of warding off even worse problems.
However, it seems unlikely his warning will get much of an audience in the US. The Wall Street Journal not only did not pick up on his comments (or independently report on the leveraged loan market), but in a separate story, also put a positive spin on a Bank of England report that warned of increasingly lax lender behavior.
From the Financial Times:
Lenders to highly indebted companies are making the same mistakes that undermined the US subprime mortgage market, suggesting the leveraged loan market will become “tomorrow’s problem”, says the chief executive of BlackRock, the $1,000bn-plus fund management group.
The comments from Larry Fink highlight the rising debt levels, falling risk premiums and loosening standards in loans made to leveraged buy-out vehicles and other junk-rated groups.
“If I was the chairman of the Federal Reserve, I’d be paying more attention to that because, to me, this is going to be tomorrow’s problem,” Mr Fink said in an interview with the Financial Times. “Standards have deteriorated to levels that we never even dreamed that we would see.”
His comments coincide with a warning from the Bank of England which says today that the surge in cheap corporate lending with looser credit standards “has increased the vulnerability of the [global financial] system”. The Bank also cautions against weakening standards of risk assessment when bank loans are repackaged and sold on to the rest of the financial system….
The biggest reason for weakening lending standards is plentiful liquidity and consequent strong investor demand, Mr Fink said.
He said he was also worried that so many investors are moving into illiquid “alternative” investments such as hedge funds and private equity, a potential concern in any downturn.
Aggressive lending is also supporting the private equity industry, and Mr Fink said any credit slump would have a knock-on effect on private equity groups such as Blackstone.