Leveraged loan repeal won't make things worse: Moody's

NEW YORK: Moody's said it believes the potential repeal of leveraged loan guidance would not materially worsen lending conditions, primarily because the market is already overheated.

Here are highlights from the ratings agency's report:

- On October 31, the Government Accountability Office announced that the Interagency Leveraged Lending Guidance (LLG) issued in 2013 by the Federal Reserve System, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency is an act that falls under Congress's right to review and disapprove.

- The timing and outcome of any such Congressional determination remains unclear.

- LLG has done little to check an overheated market, even though regulated banks have exercised more restraint in underwriting loans that exceed 6x leverage. That's in part because many smaller, less-regulated financing firms have stepped in to fill any gaps.

- While a repeal could see banks become more aggressive in lending practices, which would be a credit negative for investors, Moody's does not believe it would materially worsen lending conditions, primarily because the market is already overheated.

- Overheated conditions will likely continue unless checked by other developments.

- The US leveraged loan market has swelled to almost US$1trn in outstanding volume, compared to about US$400bn in 2007, spurred by increased liquidity due to quantitative easing.

- As leverage levels have shot higher, credit quality, loan agreements and capital structures have all trended lower.

- Investors have been willing to buy highly leveraged loans with few protections and higher debt multiples as they hunt for yield in the low interest rate environment.

- Moody's expects 2018 issuance and credit quality to largely emulate those of 2017, absent any external events that would restrict liquidity in the leveraged loan market.

- Congressional tax reform proposals, limiting the deductibility of interest expense for tax purposes, could restrict viable transactions if enacted.