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This is the epicentre of the next financial blow-up

Karen Maley
Oct 16, 2023

If there’s one thing senior bankers can agree upon, it’s that the next blow-up in global financial markets will be centred on the massive US leveraged loan market. It’s not surprising that bankers are concerned, given that a staggering $US350 billion ($554 billion) of low-cost loans taken out by highly geared companies have to be refinanced in the next three years.

But these companies now find themselves in a bind. Their revenues are coming under pressure as a slowing US economy dents their sales and squeezes their profit margins. At the same time, the steep rise in US interest rates since early 2022 means these companies are about to be hammered by a huge rise in borrowing costs on their massive debts.

Some highly leveraged companies will be able to call on their investors – particularly if these are private equity sponsors – for extra equity which they can use to whittle down their debt burdens. But there will be limits to the extent to which private equity firms will be willing to bail out troubled portfolio companies. Many investors will be reluctant to see their money being used to rescue companies that are over-leveraged and underperforming, particularly if their fund is reaching the end of its life.

At the same time, many large US banks have been stung by the heavy losses they’ve suffered from offloading the leveraged loans they agreed to underwrite before the era of cheap money came to a screaming halt last year.