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The report highlights a number of risks, including short-term risks associated with the unwanted expansion of arranger banks' balance sheets due to undistributed leveraged loans, medium-term risk resulting from the refinancing needs of highly leveraged corporations and long-term risks for the availability of leveraged finance.
The working group report on private equity and leveraged finance markets addresses two broad questions.
The development of the leveraged loan market can be seen as an example of the benefits of a system of market-based intermediation of credit, the report finds. The broadening of the investor base in leveraged finance markets and the growing commitments to private equity funds have increased the availability of alternative sources of capital to businesses, potentially enhancing the resilience of corporations to funding shocks.
Recent market events have demonstrated that enhancing transparency and strengthening risk management practices require special attention. For example, more timely disclosure of balance sheet information might enhance transparency and improve creditors’ ability to monitor borrower credit quality. In the area of risk management, improvements in stress testing warrant greater attention.