Loose underwriting standards for leveraged loans are becoming more popular even as credit quality worsens, according to Goldman Sachs Group Inc.
Mark DeNatale, the head of Goldman's bank loan trading, said in a conference call with clients Wednesday that issuance of new loans with more forgiving terms than traditional loans, or "covenant light loans," has reached $65 billion already this year.
"That's greater than twice the cumulative covenant-light issuance in the last 10 years combined," he said.
Mr. DeNatale said the banking industry has entered the downside of the commercial credit cycle, though he declined to speculate where in the cycle the industry sits now.
Despite that fact, he described both the new issuance and secondary market as remaining strong this year, driven by stable demand for senior-secured bank loans from alternative lenders and the emergence of new products, such as derivatives, to mitigate risk. And now, the burden of risk lies with underwriters, according to Mr. DeNatale, because of the number of public-to-private transactions and the lag time in closing those deals.
"It takes eight to 12 months for those transactions to clear regulatory hurdles and that interim risk - whether it be financing commitments or equity-bridge commitments - shifts with the underwriters," Mr. DeNatale said.
