Leveraged loans to private equity are not just flashing red but have a wailing siren and a man walking in front waving a flag. The loans are even bothering the see-no-evil officials at the Federal Reserve, who have been trying to persuade banks that excessively leveraged loans are risky.
More than a third of leveraged loans this year have lent more than six times earnings before interest, tax, depreciation and amortization, only slightly below the proportion at the peak of the 2007 credit bubble, according to S&P Capital IQ.
Bank exuberance is shown by loans with less lender protection than usual. The proportion of “covenant light”, or cov-lite, loans is above 60 percent, the highest ever. If and when things go wrong, it will be harder for lenders to demand their money back.
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