Leveraged Loans: Definition and Market Development

13 Pages Posted: 23 Oct 2019 Last revised: 18 Dec 2019

Date Written: October 10, 2019

Abstract

Over the past decade, the volume of leveraged loans has grown to reach its highest level since the end of the crisis. Growth has been more contained in Spain, which accounted for 5% of the total volume of such lending in Europe in the period 2016-2018.

The terms and conditions of leveraged loans have become less restrictive and a large proportion is distributed among institutional investors worldwide, in the form of collateralised loan obligations (CLOs).

This originate-to-distribute model poses potential risks for the financial system. In the event of a cyclical downturn the losses in this market could be significant, in particular, owing to the relaxation of investor protections. In addition, given the importance of these loans as a source of corporate financing, a rise in defaults would have adverse effects on the real economy.

Keywords: leveraged loans, CLO, syndicated loans

JEL Classification: G23, G15, G32

Suggested Citation

G. Pedraz, Carlos, Leveraged Loans: Definition and Market Development (October 10, 2019). Banco de Espana Article 29/19. Available at SSRN: https://ssrn.com/abstract=3473779 or http://dx.doi.org/10.2139/ssrn.3473779

Carlos G. Pedraz (Contact Author)

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

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