In ZIRP World, the Perpetual Reach for Yield Increasingly Ends in Bankruptcy Court

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via Reuters:

It seemed like an opportunity a lender would not want to miss.

The loan paid 10.25 percent interest which would go up if a benchmark rose. The borrower was Trident USA Health Services, a growing company which provided bedside medical testing in nursing and assisted living centers.

Trident was buying similar companies across the country targeting cost savings from consolidation. Trident filed for bankruptcy last month. It had taken on too much debt to cope with reduced Medicare and Medicaid payments, equipment upgrades and other issues. A new billing system for the expanded company failed and it never collected millions of dollars. Trident’s lenders face estimated losses of 50 to 100 percent. “We were wrong,” Michael Mauer, chief executive of CM Finance Inc, (CMFN.O) one of the lenders, said in a Feb. 7 call with stock analysts.


After the Great Recession, regulators squeezed much of the risk out of U.S. banks. But risk has not gone away. Much of it now resides in non-bank financial entities, including commercial loan companies, such as CM Finance, private credit funds, and structured finance vehicles, many of which have yet to be tested by a broad recession after a nearly decade-long expansion.

The borrowers include mid-sized, speculative-grade companies that have loaded up on debt to fund their expansion. Sometimes one setback can push them over the edge, as happened with Trident’s botched billing system roll out.

“We think credit losses will rise,” said Matt Carroll, a credit analyst at S&P Global Ratings. His reasons: A lot of money has flowed into private credit, pushing down lending standards in a benign economy.

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Some $900 billion in non-bank loans to mid-sized companies sit alongside another $1.1 trillion of speculative-grade loans that have been made by bank syndicates to larger companies and mostly resold to institutional investors. These amounts are dwarfed by the $11 trillion in outstanding U.S. home mortgage loans and probably are not enough to drag down the financial system, as mortgages did during the 2007-2009 crisis.

However, rising non-bank debt has fueled concerns it could make a recession worse because loan losses could cripple many non-bank lenders, leaving companies most in need without access to credit. “When you have a real recession, the lender will not be there. So, a lot of these borrowers will be stranded,” JPMorgan Chase & Co chief Jamie Dimon told analysts in January….


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