Fed urged to get serious about US corporate debt risks

NEW YORK/ST. LOUIS (Reuters) – Bankers, executives and investors are warning Federal Reserve officials behind closed doors that record leveraged lending to companies from lightly-regulated corners of Wall Street could make any economic downturn harder to manage.

With the second-longest US expansion in its advanced stages, the worry is that a key part of the credit market could be particularly vulnerable to a slowdown, as highly-indebted companies face a greater risk of default.

Some of those involved in the debate who spoke to Reuters expressed frustration that the Fed is not taking the risk seriously enough.

“There is a sense at the Fed that it needs to watch this area, leveraged credit, but it’s still in the infancy and it’s unclear how far will it go,” said an economist familiar with the Fed’s efforts.

In a worst-case scenario that would faintly echo the financial crisis a decade ago, the defaults could worsen any downturn by destabilizing big non-bank lenders, such as private equity firms and hedge funds, and hitting employment across US industries. Leveraged loans are typically made to already indebted firms with low credit ratings, and the concern is that the loans would be difficult to either collect or resell in a downturn, putting both the borrower and lender at risk.

Few believe leveraged loans today would set off a crisis similar to the one triggered by a wave of defaults in the US subprime mortgage market in 2008, since they are focused on a smaller part of the economy than the sprawling housing market.