Every firm that wants to borrow money and leverage opportunities is coming to the market. The taper has started and even with forward guidance that rates will stay low, there is a growing sense that you better get your cheap financing now. Poorer quality companies will try and obtain money sooner. If you are on the edge, get your cheap money.
On the other side of the equation are billions of available funds that wants to find a home. These funds are willing to be less selective on terms to get funds invested. This combination of creditors that need cash and lenders willing to supply at less stringent terms is toxic and is the basis for growing view that we are headed for another credit crisis. The latest example of this negative view was in a recent FT article on the demand for risky assets.
The chart tells the story. Leveraged finance volume is higher than pre-crisis levels. This is with many credit markets showing less growth and deleveraging occurring in many areas. I will note that commercial paper issuance is way down relative to pre-crisis levels and excess reserves are at highs. The new Wall Street game is packaging loans and selling them to investors while keeping higher quality paper on the balance sheet. No trading but syndication. Junk bond issuance has also surged. There is some concern that lending terms are looser. Is this the intent of the low interest rate policy of the Fed?
If all of this money is going to marginal companies, what will happen if there is a rise in rates? More importantly, what will happen if there is a decline in growth or growth just stays at the current anemic levels?
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