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Risky Bank Or Leveraged Loans Are Selling Off. What It Means For Investors

Risky Bank Or Leveraged Loans Are Selling Off. What It Means For Investors

leveraged loans
About $23 billion in leveraged loans have been sold off so far this year. The price on each of these loans fell at least 10 cents on the dollar. Computer vector created by macrovector www.freepik.com

Risky bank loans or leveraged loans are selling off in a worrying trend that points to trouble for investors, Barron’s reported.

About $23 billion of the controversial loans have been sold off so far this year. The price on each of these loans fell at least 10 cents on the dollar, according to Citigroup strategist Maggie Wang.

More than half of these risky loans were rated higher than the market’s lowest-rated loans, which means the prices on most of the loans have dropped 24 cents per dollar in that selloff, Wang wrote in an Oct. 11 note.

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Gambling on leveraged loans

Investors have taken advantage of more than $3.5 trillion in private equity buyout deals over the past decade combined with rock-bottom U.S. interest rates to gamble on these riskier assets, including collateralized loan obligations, according to Bloomberg.

Collateralized loan obligations are securities that are backed by a pool of debt. They are funky creations of Wall Street wizardry that have been around for decades and made it through the financial crisis unscathed.

If the global manufacturing slowdown is going to send the U.S. economy into a recession and hurt the riskiest companies’ cash flow, investors should stay out of high-yield debt altogether, Alexandra Scaggs of Barron’s wrote.

But if recession fears are overblown and profits keep growing for risky corporate borrowers, investors should consider buying the lowest-rated bonds and loans, since those securities are cheap, based on historical data.