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Leveraged loans are booming in the U.S.
Volumes have risen 53% this year and are on track to surpass the $534B record set in 2003. The high rate of lending is causing concern among regulators and investors because a boom in leveraged loans was one of the first signs of the market overheating prior to the last financial crisis, the Wall Street Journal reports.
Leveraged loans are typically provided to companies or individuals that have large pools of debt. They tend to be more expensive and have higher interest rates because the borrower carries a higher risk of default.
In the past, private equity firms have favored this type of lending when attempting to raise cash to fund a company takeover.
This year, loans issued to fund leveraged buyouts from private equity companies in the U.S. totaled $88.5B, an increase of 74% from last year, the WSJ reports.
The recent Toys R Us bankruptcy filing is a prime example of a company that had piled on too much debt. According to the WSJ, a large portion of the $5.3B it had accumulated was made up of leveraged loans and high-yield bonds.
Earlier in the summer, experts began to look at private equity firms as being the possible catalyst behind a growing number of retail bankruptcies this year.
Many of the retailers that filed for bankruptcy protection were bought out by private equity firms, including True Religion Apparel, which is owned by TowerBrook Capital Partners, and Payless ShoeSource Inc., which was acquired by Golden Gate Capital and Blum Capital. Concern has mounted over whether these buyout firms played a part in exacerbating the struggles of retailers by forcing them to take on more crippling amounts of debt.
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