Page 17 - May-June 2018 GSE Report Flip Book

MONETARY POLICY MJAAYNU- AJRUYNE20210818
Companies whose credit rating is below “investment grade” can borrow in the capital markets in two ways: by issuing what is lovingly called junk bonds; and by issuing “leveraged loans.”
Leveraged loans are too risky for banks to keep on their books. Banks sell them, and they can be traded; or banks package them into Collateralized Loan Obligations (CLOs), and they’re traded as such. Being loans, they’re not considered securities, but they trade like securities. They’re the booming sisters of the languishing junk bonds.
According to Moody’s, this is what has been happening with junk bonds and leveraged loans:
• Junk bond issuance in the US plunged 52% in May from a year ago, to just $21 billion. Year-to-date, issuance has plunged 20% to $162 billion. The amount outstanding reached $1.27 trillion.
• Leveraged loan issuance in May jumped 37% from a year ago to a record $88 billion. Year-to-date, leveraged loan issuance rose 2.4% from a record in 2017, to $363 billion. The amount outstanding rose to $1.45 trillion. This is the first year that leveraged loans have bypassed junk bonds.
• Combined: As junk-bond issuance fell while leveraged loan issuance rose, combined issuance year-to-date fell 5.7% to $525 billion. The combined total outstanding amounts to $2.7 trillion.
The majority of companies are junk-rated. About 60% of the US companies that Moody’s rates have a credit rating of “speculative”—otherwise known as “high yield” or “junk,” according to John Lonski, Chief Economist at Moody’s Capital Markets Research.
...So in terms of dollars, the amount of junk bonds outstanding ($1.27 trillion) accounted for only 17% of the total amount of corporate bonds. But when the $1.45 trillion of “leveraged loans” are added to the picture, the total rises to 37% — and that’s a lot of high-risk debt.
But these junk-rated companies tend to be smaller. Though they carry a lot of debt in relationship to their size (that’s why they’re junk rated), in aggregate they can’t measure up to the investment-grade giants, like Apple and Walmart that can issue tens of billions of dollars in investment-grade bonds in one fell swoop. For example, Walmart is currently
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