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Risk Managers' Views on Leveraged Loans

January 15, 2021

The Risk Snapshot Series highlights key insights from GARP’s quarterly survey of Financial Risk Managers (FRM®) about critical risk issues global risk managers and their organizations are navigating.

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.

 

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_2.1_riskofdefault

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_2.2_Organizations

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_2.3_RecoveryRates

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.
GBI_RiskSnapshots_2.4_Policymakers

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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