Leveraged Loan Defaults Hit $23 Billion – The Highest In Two Years
According to Forbes, leveraged loan defaults are now at $23B, which is the highest they’ve reached in two years. Not only that but between October and November of this year, 11 issuers defaulted to the amount of $7.8B. None of this is good news for the market or investors.
Comprised of lending syndicates to speculative companies that have junk grade credit, leveraged loans are high-risk credits that the US Securities and Exchange Commission does not regulate. Now, Forbes is reporting that leveraged loans are defaulting from every area of the economy, with the energy and retail sectors being hit especially hard.
A Seeking Alpha article from January noted that according to Morningstar data, over $11B of leveraged loans had gone into 64 bank loan mutual funds by that time of the year already and had helped to create a leveraged loan market that was even bigger than the bond market. The author went on to note that weak covenants stating what borrowers need to do to keep lenders’ interests safe do not bode well for investors should there be trouble in the market.
Investor Lawsuit Alleging Securities Fraud Over Leveraged Loans
While banks and industry groups have argued that loans are not securities, one investor lawsuit against JP Morgan (JPM) and several other banks over loans that were leveraged are alleging securities fraud.
Considering that the leveraged loan market, with its now more standardized loan terms, increase in secondary trading and weakened covenants are starting to look a lot like the bond market – and bonds are securities — the plaintiffs may have a point.
In their leveraged loan fraud lawsuit, the claimants are going after JP Morgan for not telling them that US officials were investigating Millennium Health LLC, which the bank arranged a $1.8B loan for and then sold to investors in 2014.
Not long after, Millennium disclosed that their billing practices were being probed by the government, causing the loan’s value to plunge. Millennium then settled the investigation by agreeing to pay $256M and it filled for bankruptcy.
While JP Morgan has argued that it didn’t think that notifying investors about the investigation was necessary because Millennium told the bank the probe wasn’t material, the plaintiffs believe that JP Morgan should be held liable for not disclosing this information.
Other defendants in the leveraged loan lawsuit include Citigroup, Bank of Montreal, and SunTrust.
Leveraged Loans And Collateralized Loan Obligations (CLOs)
Most of the leveraged loan funding comes from collateralized loan obligations (CLOs) of which its investors tend to take on higher risk in exchange for more diversity and above-average returns.
CLOs also tend to be held by securities firms, banks, insurance companies, pension funds, and retail funds – meaning that even retail investors could find themselves in trouble should the leveraged loan market fail.
Investor Fraud Lawyers
Shepherd Smith Edwards and Kantas, LLP (SSEK Law Firm) is a securities fraud law firm that has helped many thousands of investors to recover the money they’ve lost due to the negligence or fraudulent actions of brokerage firms, their brokers, investment advisors, and others in the industry.
We represent clients in their CLO investor fraud cases and leveraged loan fraud claims. If you are a victim of the leveraged loan defaults, contact SSEK Law Firm today.