The High of the Leverage Loan Boom

The leverage loan market experienced a boom, with concerns dating back before COVID. Financial regulators began tightening capital requirements for leverage loans. In the past, there were instances of excessive risk-taking, highlighted by a framed t-shirt in a bank's office joking about taking advantage of clients. This period, around 2015-2016, marked the peak of the leverage loan boom. Despite potential froth in the market, the majority of buyers, around 70%, come from collateralized loan obligations (CLOs), which are not active traders. This lack of active trading in the market has contributed to masking potential volatility. Before the pandemic, power in the market had shifted from lenders to borrowers, allowing companies to dictate terms of the deals, leading to an increase in cov-lite deals and risky leverage.