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Leveraged loans: definition and market development

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  • Carlos González Pedraz

Abstract

Over the past decade, the volume of leveraged loans has grown to reach its highest level since the end of the crisis. Growth has been more contained in Spain, which accounted for 5% of the total volume of such lending in Europe in the period 2016-2018. The terms and conditions of leveraged loans have become less restrictive and a large proportion is distributed among institutional investors worldwide, in the form of collateralised loan obligations (CLOs). This originate-to-distribute model poses potential risks for the financial system. In the event of a cyclical downturn the losses in this market could be significant, in particular, owing to the relaxation of investor protections. In addition, given the importance of these loans as a source of corporate financing, a rise in defaults would have adverse effects on the real economy.

Suggested Citation

  • Carlos González Pedraz, 2019. "Leveraged loans: definition and market development," Economic Bulletin, Banco de España, issue DEC.
    • Handle: RePEc:bde:journl:y:2019:i:12:d:aa:n:29
    Note: Analytical Articles
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    File URL: https://www.bde.es/f/webbde/SES/Secciones/Publicaciones/InformesBoletinesRevistas/ArticulosAnaliticos/19/T4/descargar/Files/be1904-art29e.pdf
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    Cited by:

    1. Aikins Abakah, Emmanuel Joel & Gil-Alana, Luis A. & Arthur, Emmanuel Kwesi & Tiwari, Aviral Kumar, 2022. "Measuring volatility persistence in leveraged loan markets in the presence of structural breaks," International Review of Economics & Finance, Elsevier, vol. 78(C), pages 141-152.

    More about this item

    Keywords

    leveraged loans; CLO; syndicated loans;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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