How large is the leveraged loan market?

Published on 25 January 2019

We estimate that there is more than US$2.2 trillion in leveraged loans outstanding worldwide. This is larger than the most commonly cited estimate and comparable to US subprime before the crisis.

Focus on leveraged lending as a potential source of financial stability risks has intensified recently.

But measuring the size of the leveraged loan market is complicated: there is no consistent definition of what a leveraged loan is.

The most commonly cited estimate of the market uses a figure of around US$1.3 trillion. This is the value of loans in indices that are used to track performance of the leveraged loan market. We think this underplays the true size of market. It only captures loans that are distributed to non-bank, institutional investors. And, within that, it mainly captures larger, more liquid loans.

When we account for smaller, less liquid loans, as well as lending facilities that are held by banks, the size of the market is more like US$2.2 trillion (Chart A). Around US$1.8 trillion of this is typically held by non-bank institutions.

We estimate US$2.2 trillion in leveraged loans in outstanding worldwide(a)

(a) Association of British Insurers, Bank of England, Bloomberg Finance L.P., Cass Commercial Real Estate Lending survey, Datastream from Refinitiv, Deals Business Intelligence from Refinitiv, Deloitte, ECB, Federal Reserve Bank of New York, Federal Reserve Board, ‘Financial Accounts of the United States’, LCD, an offering of S&P Global Market Intelligence, London Stock Exchange, New York Fed Consumer Credit Panel, ONS, Pinto, E (2010), ‘Sizing total exposure to subprime and Alt-A loans in US first mortgage market as of 6.30.08’, Memorandum for Financial Crisis Inquiry Commission, Preqin, US Bureau of Economic Analysis and Bank calculations.

See full footnotes in the Financial Stability Report, November 2018.

This makes the stock of leveraged loans in 2018 comparable to the stock of US subprime mortgages before the onset of the financial crisis, if measured relative to the size of the relevant credit market. But there are several reasons to think it is less risky (see Financial Stability Report, November 2018).

A large share of leveraged loans are sold to non-bank institutional investors. Around 45% of the stock of these are held through collateralised loan obligations (CLOs), and 30% by investment funds and insurance companies together. A sizable share of the market is unallocated because it is unclear who the end-investors are (Chart B). Banks also have significant exposures to the same borrowers via amortising loans and revolving credit facilities.

This post explores which investors are most exposed to CLOs.

Indicative estimated holdings of leveraged loans by global investors(a)

(a) BarclayHedge, Bloomberg Finance L.P., FCA Alternative Investment Fund Managers Directive (AIFMD), LCD, an offering of S&P Global Market Intelligence, Morningstar, National Association of Insurance Commissioners and Bank calculations.

See full footnotes in the Financial Stability Report, November 2018.

This post has been prepared with the help of Danny Walker.

This analysis was presented to the FPC as part of its 2018 Q4 round.

Share your thoughts with us at BankOverground@bankofengland.co.uk