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“This will end badly,” says J.P. Morgan strategized on a tree in Banana debt on Wall Street

Much twisting has accompanied the emergence of a corner of the credit market on Wall Street, which has shown many of the hallmarks of a bubble. However, Anton Pil, management partner at J.P. Morgan Asset Management, having done the best at a Wednesday lunch hosted by the company to discuss its alternative investment guide. "This will end badly," says Pil, and expresses his belief that growing appetite for so-called rented loans and a later increase in the production of some form of debt that increasingly has less protection for investors and limitations for borrowers – Known as "covenant little" – can bloom to a bigger problem on Wall Street. David Lebovitz, the global market strategist at the company, recently quoting his research, said that the composition of lenders in private credit has shifted away from traditional banks and non-lenders, thus reducing the quality of loan loans. Up to 1 994, 71% of so-called leased loans were financed by bank borrowers and 29% were provided by non-banks. Now, 91% of the delivery loans are provided by non-lenders, Lebovitz explains. As a result, "nearly 80% of delivery loans issued last year were considered federal," Lebovitz said at lunch, which also included Pil and David Kelly, JP Morgan Asset Management's global strategist. At the end In January, Moody & # 39; s Investors Service said that its credit condensation indicator, which measures the level of overall investor protection in federal speculation loan packages, rose to record 4.16 in the quarter and peaked the…

Much twisting has accompanied the emergence of a corner of the credit market on Wall Street, which has shown many of the hallmarks of a bubble.

However, Anton Pil, management partner at J.P. Morgan Asset Management, having done the best at a Wednesday lunch hosted by the company to discuss its alternative investment guide.

“This will end badly,” says Pil, and expresses his belief that growing appetite for so-called rented loans and a later increase in the production of some form of debt that increasingly has less protection for investors and limitations for borrowers – Known as “covenant little” – can bloom to a bigger problem on Wall Street.

David Lebovitz, the global market strategist at the company, recently quoting his research, said that the composition of lenders in private credit has shifted away from traditional banks and non-lenders, thus reducing the quality of loan loans.

Up to 1

994, 71% of so-called leased loans were financed by bank borrowers and 29% were provided by non-banks. Now, 91% of the delivery loans are provided by non-lenders, Lebovitz explains.

As a result, “nearly 80% of delivery loans issued last year were considered federal,” Lebovitz said at lunch, which also included Pil and David Kelly, JP Morgan Asset Management’s global strategist.

At the end In January, Moody & # 39; s Investors Service said that its credit condensation indicator, which measures the level of overall investor protection in federal speculation loan packages, rose to record 4.16 in the quarter and peaked the previous high of 4.10 in the third. The quarter of 2018 and again in the second quarter of 2018.

Delivery loans are usually used to finance transactions with private capital and mergers and acquisitions and to refinance or recapitalize existing debt on the company’s balance sheet.

Because debt carries floating interest rates, a rising interest rate environment that the one played in 2018 can make paying that type of debt more expensive for borrowers, making them more prone to default settings. In addition, an economy in the later expansion stages, where expectations of a recession grow, also create an insecure background for risky credit, said asset managers for J.P. Morgan.

Borrowing in the loan financing in the US has ballooned over the past two years and rises beyond levels seen during the financial crisis 2007-2009. Such borrowing hit a record $ 1.66 trillion in 2017 and amounted to $ 1.46 trillion in 2018, according to Dealogic data. It represents the largest two-year rise ever in the industry.

Private credit has been attractive to institutional investors as pension funds, as they are not exposed to vicious price fluctuations as in stocks, and they can offer richer returns than corporate bonds or Treasurys, with US 10-year government bonds

TMUBMUSD10Y, -1.10%

offers a relatively small yield of 2.69%. Unlike the average Dow Jones Industrial Average dividend yield

DJIA, -0.52%

is 2.4% and 2.1% for the S&P 500 index

SPX, -0.65%

according to FactSet data, but these benchmarks have also risen about 10% so far in 2019.

Both the International Monetary Fund, a blog post and the Federal Reserve have recently flagged the resurgence of leased loans as a risk host to closely follow.

Despite concerns about delivery loans, Lebovitz showed relatively sanguine than Pil on the possibility of such a debt to provide a systemic failure in the financial markets associated with the implosion produced in the aftermath of the mortgage-backed securities debate that crept around the world a decade ago.

“In our view, a wave of default values ​​would definitely exacerbate any downturn in the economy because the exposure to banks is modest, we do not think it represents the same systemic risk as mortgage loans returned in 2008,” said.

That being said, Lebovitz noted that a cycle of non-bank lenders operating private loans drove up multiples on offers, according to Bank of England data.

“They estimate that leveraged lending last year amounted to about $ 800 billion globally, and of the $ 800 billion, about 60% of the disbursed loan expense was used to fund M&A [mergers] and LBO [leveraged buyouts] transactions. “Do you have private credit funds that now lend to private companies,” he says.

“The increased amount of leverage in the system generally increases the multiples you see on these deals,” said libovitz.

So, rather than freak out, said Lebovitz that investors must be sensitive to the debt they invest in and the managers they choose.

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