(New York)

It is no secret that credit has expanded mightily in the last several years. The investment grade corporate bond market has completely ballooned, but leveraged loans have been another important area of growth. And while the risk of IG corporate bonds is well understood, the risks of the latter are less apparent. Leveraged loans are popular right now because they have floating rates, but those rates are a big risk. The reason why is not in the extra payments themselves, but because most leveraged loans are issued to refinance existing debt. The issue is that when corporate borrowers come back to the market to refinance, they might find many less lenders and much higher rates. The is so because as rates rise, other safer asset classes become more attractive.

FINSUM: The whole corporate sector has been binging on low rates for years, and there is bound to be a reckoning. The scale of that reckoning is the big question.