Wall Street’s junk war is heating up.
On one side are major banks, which are diving back into high-risk corporate lending now that U.S. regulators have loosened up.
On the other are so-called shadow lenders -- private equity shops, boutique banks and other financial players that muscled in on this business when regulators restrained the big banks five years ago.
The result: ever-growing competition to provide junk-rated debt used in corporate takeovers. It could turn out to be a “race to the bottom,” said Frank Ossino, a senior portfolio manager at Newfleet Asset Management in Hartford, Connecticut.
For the $2.3 trillion-plus market in junk bonds and leveraged loans, the question is whether all this competition ultimately brings new, greater risks. Underwriters have already been piling more and more leverage onto companies and watering down various protections for investors. Much of that debt is being packaged into complicated structured investments at a pace reminiscent of the subprime boom a decade ago.
“The real test will be the market reaction and ultimate recovery if loans made by these entities begin to default,” Ossino said.
That was part of the reason the Federal Reserve and other regulators drew up guidance in 2013 to curb leverage as part of efforts to prevent a rerun of the financial crisis. What the policy makers perhaps didn’t foresee was the extent at which the shadow banks -- funds outside their purview -- would fill the role of the big banks.
Market Share
Less-regulated lenders such as private equity firm KKR & Co. Inc. and credit manager Antares Capital saw multi-fold increases in their percentage share of new U.S. leveraged loans they underwrote between 2013 and 2017, according to data compiled by Bloomberg. So did U.S. units of Australia’s Macquarie Group and Japan’s Nomura Holdings Inc. Jefferies Group LLC, the biggest non-bank lender on the deals this year, increased its share to 6.13 percent at the end of 2017 from 3.71 percent four years ago. A division of Golub Capital had 1.28 percent of the market in 2017, compared with 0.08 percent in 2013.
The 10 of the most closely regulated banks underwrote about 54 percent of new U.S. leveraged loans this year compared with about 70 percent in 2013, when the guidance came down, according to data compiled by Bloomberg.