The $1-trillion industry that makes loans to companies shut out of the corporate bond market faces “systemic risks” due to illiquidity, lax standards, and a lack of transparency, according to a report by Moody’s Analytics.
Investors have channeled a flood of cash into the so-called private lending market during the COVID area, seeking higher returns than tamer investments were able to offer.
In this private market, asset managers such as Apollo Global Management and Ares Management Corp. tailor custom loans with often stiff interest rates to mid-size companies too small to access the corporate bond market.
These mid-size companies often are owned by private equity firms, which have a record of piling debt onto businesses they buy.
“The mounting tide of leverage sweeping into a less-regulated “grey zone” has systemic risks,” Moody’s analysis noted.
“Risks that are rising beyond the spotlight of public investors and regulators may be difficult to quantify, even as they come to have broader economic consequences,” Moody’s warned.
Share values of “business development companies,” a key segment of the private lending market, plunged as much as 55 percent when the COVID War began.
However, the U.S. Federal Reserve’s rock-bottom interest rates and other forms of federal stimulus revived the industry, lofting share prices by as much as 175 percent since March 2020 and enticing investors back into the business, the Financial Times said.
Companies owned or controlled by private equity firms fail at twice the rate of other businesses, some critics have claimed.
TREND FORECAST: When the Fed rates rise to 1.5 percent the economy and equity markets will tank and bring down the weakest most indebted businesses the hardest. And when America sneezes, the rest of the world catches cold. Thus, it will be a crash felt around the world.