Where will the next financial crisis start?

The resurgence of “covenant lite” or “cov-lite” loans could spell trouble, says Marina Gerner.

906_MW_P04_Markets_Bottom

Investors are partying like it's 2007

The global financial crisis of 2008 was triggered by a bubble in the US housing market. Lightning rarely strikes twice, however, and American residential property seems unlikely to be at the centre of another collapse.

So where might the next crisis come from? Bankers and lawyers say the corporate debt market is the frothiest they have seen since 2007, Oliver Shah points out in The Sunday Times. The most obvious sign of irrational exuberance is the resurgence of "covenant lite" or "cov-lite" loans. This kind of debt, which offers little or no protection to lenders if the loans go sour, boomed in the years leading up to the financial crisis, "with the inevitable outcome". They then went out of fashion but are now "back with a vengeance". In the US, cov-lite loans account for a record 75% of the $790bn in outstanding leveraged loans. In Europe, cov-lite leveraged loans doubled in value last year.

Private equity is another area gathering steam rapidly. Funds have been raising money at the fastest rate in more than a decade, says Javier Espinoza in the FT. This includes those that invest in infrastructure and real estate. "Buyout executives are rushing to tap" demand from investors "just as fears grow of a market correction".

The average time taken for a private-equity fund to raise the money it wants has halved to one year since 2010. This is the fastest pace in over ten years. "None of this necessarily means we are on the brink of Armageddon," says Shah. But this froth in debt and stockmarkets is at odds with the "drab economic backdrop" and political uncertainty. The disparity has been clear for some time, but "investors and traders have seemed happy to party on". When it all comes to an end once again, things are bound to be messy

Recommended

YouGov's Global Banking & Finance Report 2021

YouGov's Global Banking & Finance Report 2021

How COVID-19 is “changing finance” – a high-level overview of financial attitudes, preferences and habits in 17 global markets, encompassing payments,…
1 Mar 2021
What is “yield curve control” and why is it coming to a central bank near you?
Government bonds

What is “yield curve control” and why is it coming to a central bank near you?

Central banks around the world are determined not to let interest rates go up too quickly or by too much – a practice known as “yield curve control”. …
1 Mar 2021
The charts that matter: rising bond yields send markets into a tizz
Global Economy

The charts that matter: rising bond yields send markets into a tizz

Markets suffered a chaotic week as bond yields continued to climb. We look at how the week’s events have affected the charts that matter most to the g…
27 Feb 2021
How Big Tech was humbled Down Under
Tech stocks

How Big Tech was humbled Down Under

An Australian law forcing tech companies to share their profits with news organisations is a crucial test of the evolving power relations between gove…
27 Feb 2021

Most Popular

A beginner’s guide to bitcoin: the technical genius behind bitcoin and the blockchain – and how it all works
Bitcoin

A beginner’s guide to bitcoin: the technical genius behind bitcoin and the blockchain – and how it all works

In the second in his series on bitcoin, Dominic Frisby looks at the blockchain – bitcoin’s unique underlying architecture – and what makes it and the …
2 Mar 2021
A beginner’s guide to bitcoin: how to buy bitcoin
Bitcoin

A beginner’s guide to bitcoin: how to buy bitcoin

For the novice, buying bitcoin can be a daunting prospect. Here, Dominic Frisby outlines the process from start to finish.
3 Mar 2021
Why gold has been such a bad investment so far this year
Gold

Why gold has been such a bad investment so far this year

Gold – the ultimate safe haven investment – is proving anything but safe. It’s lost over $200 an ounce since its high at the start of the year. Domini…
3 Mar 2021