Felix Salmon

Loan-market datapoint of the day

By Felix Salmon
June 8, 2009

Vipal Monga breaks down the wall of debt which is going to mature over the next few years; I thought it was chartifying.


Given that historically most loan issuance has been turned into CLOs, and given that the CLO market is very unlikely to come back for the foreseeable future, there’s a lot of scope for bad news here as far as the banking sector is concerned. Remember that the stress tests only went out through 2011; they didn’t include the big spike in loan maturities, and the inevitable spate of defaults and restructurings that will result. Or, to put it another way, things are going to get worse before they get worse.

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You might have mentioned that these loans are junk grade bank debt. You’re right that CLOs were the marginal buyers here.

Beyond that, there is a way in which fruits and vegetables and financial products are opposites: when quantities are high for fruits and vegetables, quality is high, and prices are low. With financial products, when issuance is high, quality is low, and pricing is expensive, leading poor future returns from lower yields, and higher future defaults. Just a thought.


when you say “the stress tests only go out to 2011″ you are implying that defaults on these CLOs will mainly impact the banking sector. but given that these loans are packaged into CLOs, isn’t the risk generally held outside of banks ie in the shadow banking system ie in hedge funds and private equity firms?

Posted by q | Report as abusive

Is this really a large sum of money? Looks like not even 100bln by 2012. then 350bln in 2013-2014.. Most of that 2013-2014 debt will be rolled over again anyway I imagine.

Or am I just immune now to large numbers?

doesn’t seem like a large sum that the US government couldn’t handle easily..

Posted by Duff Samoa | Report as abusive

It’s hard to decide what is worse on this – the chart or the commentary.

The chart is plainly, at best completely unexplained and therefore out of context, but just as likely just plain wrong. The language is unclear as to whether, from the bank’s perspective these are assets (loans) or liabilities (debt).

Who’s debt is this? It’s too small (450bln) by orders of magnitude to be the banking system as a whole or even a meaningful set of the largest banks.

Where did the data come from?
Call reports don’t disclose this level of detail.
I suppose one could get bond info from bloomberg including maturity, but what about interbank term debt and FHLB advances?

Also, stress tests by nature DO include the longer maturities, since the stress tests looked a market valuations (including, I would assume, forward valuations) Such valuations place a gain or loss on debt just like they do assets. Such a valuation would be OAS based, and include a credit component.

This data and commentary looks like perhaps it should have been part of a larger thesis, but cut completely out of context. If you added a WHOLE BUNCH of qualifiers, explanations and accompanying data before and after maybe it could make sense. But standing alone it is crap.

Posted by Lumpa | Report as abusive

What the chart points out, while not obviously stating, that lenders issuing the bonds are having a nice sustained income for the next few years. To overcome the credit crisis, a glut of short term loan was the answer that many entities had to maintain operations.


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