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Corporate Loans to Highly Leveraged Companies Proliferate

This seems like a great time for banks to start loosening their lending standards. After all, household balance sheets are strengthening, and with mortgage rates so low, they can better afford the loans. Oh wait, you’re not talking about banks loosening their lending standards to individual homeowners? Only to corporations? Never mind.

Regulators are concerned that banks are loosening their standards for one of the riskiest forms of corporate lending, a trend that harkens back to perilous practices common in the run-up to the financial crisis.

In the past 18 months, banks have relaxed the criteria they use to determine whether to issue loans to highly indebted companies, a type of borrowing known as leveraged finance, according to a report on risk released Thursday by the U.S. Office of the Comptroller of the Currency.

The agency, which regulates national banks such as Bank of America and JPMorgan Chase, is noticing more institutions allowing companies to take on higher levels of debt. Banks are also signing off on deals that provide limited lender protection if the borrower fails to keep up with payments.

Welcome to the Bain Capitalization of America. These are precisely the kind of deals seen in leveraged buyouts from private equity firms. They’re supported by demand from institutional investors like hedge funds, which capture the high yields. But they threaten the livelihoods of the companies thrown into debt in these games. And this gets enabled, by the way, by the tax preference for debt over equity. Private equity firms can lard up debt on the companies they buy and strip them of wealth, without much concern for the workers involved or whether the company survives.

These loans are approaching pre-crisis levels. And a lot of the deals are – wait for it – getting securitized, and sold off to investors. It’s like nobody learns anything. And considering how Wall Street bounced back after the crisis, why should they?

In ten years, Glenn Hubbard will give a deposition about how the leveraged finance loans were no different than other loans in the same time period…

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David Dayen

David Dayen

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