BUSI 536 - Module 5 - Discussion Post.docx

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Running header: Describe and discuss the role the leveraged loan market plays in M&A transactions. 1 Abstract The levered loan market is not different than that of the junk bonds. According to Patricia A. Gaughan [Pat18], there was a shift from 1% to 10% default rates on leverage loans before and during the great recession of 2008. However, it has since come down to pre-recession levels. A leveraged loan can be a cash-cow or a nightmare, highly depended on the market performance. Due to its high interest rates, banks can harvest high profit from them, therefore increasing the availability of loan providers over the years. However, according to Eshe Nelson [Esh18] the International Monetary Fund (IMF) decided to raise the alarm of the $1.5 trillion leverage loan market, grown through debt from companies in a financial predicament. Leveraged loans are a risk behavior that while can supply the market with excess capital, it can also ruin it when the defaults begin to rise. This condition is not different than the housing market collapse we experienced in 2008. According to the 2018 annual report to Congress, the office of financial research (OFR) indicates that there is a high rise of BBB- debt - the lowest grade debt considered investable – which shows an increased default risk [OFR18]. Debtors, in that case, were consumers and not companies, got access to capital they could not afford in the long-term, to purchase assets that eventually lost. Following, the author discusses the role of the leverage loan market and its impact on the overall economy. Leveraged loan equals economic expansion The monetary policy often focuses on the microeconomic implications, adjusting rates to flood the market with low-interest capital, and deregulations to allow more freely corporate movements. According to Krug [Seb18], monetary policy should begin setting macroeconomic directions with controlled regulations that do not allow the banks to “imprudent lending (Costa, 2018)
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Describe and discuss the role the leveraged loan market plays in M&A transactions.
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