Leveraged Loan Boom Is a Threat, Says BofA Chief

Leveraged loans pose a menace to the nation’s otherwise humming economy, according to Bank of America CEO Brian Moynihan. And he ought to know: B of A is the top issuer of them.

“It’ll be ugly for those companies if the economy slows down and they can’t carry the debt and then restructure it, and then the usual carnage goes on,’’ said Moynihan, in an appearance at the Economic Club of New York. He took pains to say his own bank did not participate in iffy loan deals, adding that it puts a premium on “responsible growth.”

Leveraged loans, in which the banks are lending to highly indebted companies, have expanded nicely in recent years. In 1998, the loans were dwarfed in volume by junk bonds, by a 7-to-1 ratio.

Loans first took off in the M&A-crazed years before the financial crisis, almost reaching parity with junk bonds. Last year, the amount of outstanding leveraged loans stood at a par value of $1.04 trillion, versus $1.28 trillion for junk bonds.

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

The loans advantage is their more flexible structure. Namely, they are floating rate and often have lower coupons than do junk bonds, a plus with corporate issuers.

But beware, the bank chief said. “We don’t see anything yet because the economy’s good, the companies are making money,” Moynihan said, as reported by Bloomberg. Bank of America floated $317 billion on these loans in 2018, comprising 10.8% of that market, by Bloomberg’s count.

The B of A CEO decried the lighter covenants that the loans have these days (a condition that junk bonds display, too). With fewer restrictions, the worry is that issuers can get into trouble, but lenders won’t be able to call their loans. These looser terms, Moynihan said, are a problem “we should worry about.”

Tags: Bank of America, Brian Moynihan, covenants, Junk Bonds, leveraged loans

Japan’s rapidly aging society will be facing a retirement shock with pensions, according to a government report.

The nation, now set to host this year’s G20 summit in late June, harbors a big funding gap for its citizens in retirement. Its Financial Services Agency discovered a couple with a 95-year life expectancy will need at least ¥20 million, or nearly $200,000, more than what their retirement benefits can cover to live out their remaining years comfortably.

Since those payments are usually their only form of income, this poses a huge problem in a country where the 85.7-year life expectancy clashes with a mandatory retirement age of 60. Not to mention that the elderly accounted for 26.6% of the total population in 2016, according to a 2018 report from Natixis, which also notes that the old-age dependency ratio equates to about “45 elderly individuals for every 100 workers.”

Many receiving pensions also live below the poverty line or with family. And although the retirement age will slowly rise to 65 by 2025, the baby boomers will soon exit the workforce en masse.

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

The government is considering extending that mandatory age to 68, as a significant increase in pensioners will create a huge financial imbalance to Japan’s economy.

In the meantime, however, the Financial Services Agency’s report suggested that individuals need to increase their exposure to risky investments in a bid to bridge the gap, but must also be mindful about which products they choose.

“For a long time, in Japan, the majority of household financial assets were held in cash and bank deposits,” said Toshihide Endo, the organization’s commissioner, in a recent keynote address. “This resulted in poor performance compared to the portfolios of UK and US households, which tended to invest more in stocks and mutual funds.”

As a safer investment vehicle, Endo pointed out Japan’s UK-based 2014 Nippon Individual Savings Account, which was made more favorable for investors last year. The upgrade, slated to end in 2037, increases an account’s tax-sheltered holding period to 20 years from five, and it seems to be working.

“There has been strong demand for these products, with 1 million new NISA accounts at the one-year mark,” he said, adding that the government wants to make the product a permanent fixture given that the pressures from aging “will only grow with time.”

He also suggested Japan borrow additional pages from the UK’s pension playbook, such as its defined contribution options. That includes retirement date funds, plus auto-enrollment selections, which push people into investing.

“The flexibility of the UK’s defined contribution pension plans and tax-free investment saving accounts, together with authorities’ continuous efforts to improve them, is helping adapt UK savings and pension schemes to an aging society,” said Endo. “These may be powerful examples for Japan when setting our own policies.”

Lastly, Endo urged the government to speed up the pace for foreign investors to put their money in the Japanese market, which should enlarge its capital pool. “Our vision is to transform Tokyo to a global financial center like the City of London, one that attracts businesses, people, funding, and information from all over the world,” he said, noting that the agency has launched a consultation desk to help accelerate overseas access.

The commissioner said this economic revival would help address the aging challenges by both encouraging financial institutions to give the Japanese more investment products and boosting the country’s markets.

Endo, a Shakespeare enthusiast, ended his speech by channeling the playwright. Rather than serve its population like King Lear, who failed miserably when deciding his daughters’ early inheritance, he’d prefer Japan’s elderly “go out along the lines of ‘All’s Well that Ends Well.’”

Natixis representatives were unable to be reached for comment.

Japan’s PM Wants to Raise Retirement Age Past 65

Tags: Elderly, Financial Service Agency, Japan, Japan Aging Problem, Pension, Toshihide Endo

Subscribe to a free PW Newsletter!