If the wall of debt coming due in commercial real estate was keeping you up at night, there’s trouble brewing in the $1.4 trillion leveraged loan market as well. Cheap debt helped private equity firms deliver powerhouse returns to public retirement systems and other institutional investors over the last decade. A lot of those deals were financed with floating rate debt that became much more expensive as the Federal Reserve raised borrowing costs to the highest level since your MM host was depositing his busboy paychecks at Washington Mutual. What’s more: More than two-thirds of the $1.4 trillion leveraged loan market wasn’t hedged to protect against possible losses from higher interest before rates started climbing, debt specialists at Oaktree Capital Management pointed out in a recent research note. Those borrowers might need a break from their lenders — or their private equity backers — and that could “further limit the capital available for new deals,” according to Oaktree. That could create significant headwinds for PE-backed companies that represent a significant swath of the U.S. economy — they generate $1.7 trillion of GDP, by Ernst & Young’s estimate — and employ north of 12 million American workers. In other words: “Some of the PE guys just didn't plan for this,” Michael Feroli, the chief U.S. economist and head of global economic research at JPMorgan Chase, told our Victoria Guida on Monday. There are already some signs of trouble. The share of loans that are trading at distressed levels has climbed, Apollo Global Management chief economist Torsten Slok pointed out in a recent blog. More U.S. corporations defaulted in the first half of 2023 than at any comparable period since 2010, according to S&P Global Market Intelligence data. The Fed’s quarterly survey of bank lenders won’t offer much solace. Even as Wall Street grows increasingly bullish on Fed Chair Jerome Powell’s ability to stamp out inflation without driving the economy into a recession, banks are saying they expect to tighten lending standards through the back half of 2023. As Powell pointed out last week, bank lending is actually up compared to last year. But if lenders truly begin to turn off the spigot, private equity firms will have to manage their companies through a much more challenging environment in the near term. IT’S TUESDAY — How should policymakers be thinking about the corporate debt overhang? Send tips, gossip and suggestions to Sam at ssutton@politico.com and Zach at zwarmbrodt@politico.com
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