The Federal Reserve is further amplifying its warnings about the perils of risky corporate debt, saying in a report Monday that the market grew 20% last year and that lending standards continue to slip.
In a particularly striking sign, the Fed said the businesses with the biggest existing debt loads are also the ones taking on the riskiest loans. And protections that lenders include in loan documents in case borrowers default are eroding, the U.S. central bank said in its twice-a-year financial stability report. The Fed board voted unanimously to approve the document.
"Credit standards for new leveraged loans appear to have deteriorated further over the past six months," the Fed said, adding that the loans to firms with especially high debt now exceed earlier peaks in 2007 and 2014. "The historically high level of business debt and the recent concentration of debt growth among the riskiest firms could pose a risk to those firms and, potentially, their creditors."
Since last year, the Fed has been highlighting the increasingly weak standards in leveraged lending — the loans that often underpin mergers and acquisitions involving highly indebted companies. Still, default rates have been low amid a booming U.S. economy.