Wednesday, November 18, 2015

High-Risk Loans........ANOTHER PESKY FACT!

High-Risk Loans

Ever heard of the S&P/LSTA U.S. Leveraged Loan 100 Index? Probably not. 

As an investor who cares about building or preserving wealth, you should definitely pay attention to the message it's sending out.

This index tracks the performance of 100 large, higher-risk, higher-yielding loans. They have a term of at least one year, are denominated in U.S. dollars and are issued on a senior secured basis.

These kinds of loans are typically used to finance leveraged buyouts, mergers and acquisitions or other corporate actions, all of which soar at the tail end of a credit cycle. They're usually taken out by higher-risk companies with a lot of existing debt and lower credit ratings. As a result, they're among the first loans to sour when the economy starts breaking down, credit conditions start tightening and easy money drains out of capital markets.

You can see that it topped out in mid-2014 — before the recent stock market struggles. You can also see it made a "lower high" in early 2015, and has done nothing but fall since then. As a matter of fact, it just hit the lowest level in more than three years.

What's more important to all of us is the broader signal this index is sending out — about the economy and the stock market as a whole. Not only has it been deteriorating for more than a year, but it also didn't bounce at all with stocks in the last several weeks.

Credit markets give you an early, advance warning of problems in equity markets. That was especially true in the last major down cycle, the great credit crisis, bear market and recession of 2007-09. The deterioration in leveraged loans is a sign of a market in trouble.  

Take a look at this chart of the index ...

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