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Wednesday, Aug. 5, 2020

Are packaged business loans beginning to be viewed as a risk to the banking system?

Esther Tsvayg, Gigafact
yes

Banks' holdings of what are known as collateralized loan obligations–bundles of loans to smaller companies that have maxed out their borrowing–grew in 2019, just in time for the coronavirus-related recession to increase pressure on borrowers and raise the risks of defaults cutting or wiping out the value of their holdings. Some analysts worry that the packaged loans could pose a problem for the financial system similar to that of bundles of home mortgages in the last financial crisis.

S&P Global, which rates borrowers' credit-worthiness, says that the first pandemic-related defaults (by retailers, health clubs and others most affected) have begun to "trickle through." Lower credit ratings hitting borrowers "at record speed" are a sign to watch out for increasing trouble if business conditions don't improve.

Sources

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