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Risk Snapshots – Risk Managers' Views on Leveraged Loans

After a rollercoaster year in which risk measures for leveraged loans and collateralized loan obligations (CLOs) spiked and then retreated, GARP asked risk managers in late October 2020 how aware their organizations were of such risks and how concerned they were about them. The results show considerable concern about the potential for large defaults and losses, but confidence that businesses are sufficiently prepared.

GBI_Risksnapshots_2.1_riskofdefault

RISK OF DEFAULT
SEEN AS INCREASING

96% believe default risk has increased since
the start of 2020, and two-thirds expect an
increase in 2021.

GBI_RiskSnapshots_2.2_Organizations

ORGANIZATIONS FEEL
PREPARED FOR DEFAULTS

63% predict no impact or only minor impact if defaults
become widespread
ONLY 11% predict a major impact

  • 51% believe their company's level of concern is
    appropriate
  • 24% believe it's too low
GBI_RiskSnapshots_2.3_RecoveryRates

RECOVERY RATES ARE
A CONCERN

MORE THAN 85% believe there is a very or moderately
significant risk that recovery rates will be much worse
than in past episodes of stress.

CONCERNING LEVERAGED LOANS DEFAULT:

  • 46% believe there's been a large increase in the risk
    of default
  • 50% believe there's been a small increase in the risk
  • 4% believe there's been no change

CONCERNING CLOS IN PARTICULAR:

  • 35% believe there's been a large increase in the risk
    of default
  • 58% believe there's been a small increase
  • 7% believe there's been no change
GBI_RiskSnapshots_2.4_Policymakers

POLICYMAKERS SHOULD
ACT ‐ BUT WILL THEY?

 

  • 84% believe policymakers should do more to
    address the risks associated with leveraged loans;
    only 16% believe policymakers should not do more.
  • However, only 11% believe policymakers will take
    significantly stronger actions to address leveraged
    loan risks in 2021

The GARP Risk Snapshot “Leveraged Loans Survey” polled 87 Financial Risk Managers (FRM®) from The Americas, Europe and Asia in October 2020. Read Taking the Temperature of Risk Managers: The Outlook on Leveraged Loans to learn more.

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