History Rhyming

Not GoodRemember 2008 and 2009 when the financial system imploded because of widespread failures of high risk loans and governments across the world had to bail out the banksters?

Well, it is happening again.

Gee, massive bailouts and no prosecutions, and no one learned their lesson?

Hoocoodanode? 

US companies are defaulting on junk loans at the fastest rate in four years, as they struggle to refinance a wave of cheap borrowing that followed the Covid pandemic.

Defaults in the global leveraged loan market — the bulk of which is in the US — picked up to 7.2 per cent in the 12 months to October, as high interest rates took their toll on heavily indebted businesses, according to a report from Moody’s. That is the highest rate since the end of 2020.

The rise in companies struggling to repay loans contrasts with a much more modest rise in defaults in the high-yield bond market, highlighting how many of the riskier borrowers in corporate America have gravitated towards the fast-growing loan market.

Because leveraged loans — high yield bank loans that have been sold on to other investors — have floating interest rates, many of those companies that took on debt when rates were ultra low during the pandemic have struggled under high borrowing costs in recent years. Many are now showing signs of pain even as the Federal Reserve brings rates back down.

That's kind of scary, but then there is this:

 ………

Punitive borrowing costs, together with lighter covenants, are leading borrowers to seek other ways to extend this debt.

If you are not a financial wonk the whole, "Lighter Covenants," thing may sound arcane.  It's not.  (Wikipedia article here)

The short version is that business loans have covenants which allow lenders to intervene under certain conditions.  For example, if the underlying assets fall in value, or certain cash flow levels are not met, or regular financial reports are not made to the lender, and consequences can include calling in the loan(s).

These requirements are supposed to protect the lender for high risk loans, but over the past few decades, competition from non-bank entities like private equity and hedge funds have resulted in a lowering of lending standards.

So this paragraph basically saying, that the loans are extremely low quality, and the lenders are at serious risk of massive defaults.

Sounds familiar, doesn't it?