It cannot be excluded that certain features of the leveraged loan markets, such as debtor-friendly re-payment structures and an increasing tendency by lenders to accept breaches of loan covenants, could have contributed to a perpetuation of the benign credit cycle, while at the same time increasing the risk of clusters of defaults in the event that liquidity conditions deteriorate.
Because of the high yields they offer, leveraged loans have become popular assets for inclusion in complex structured credit derivatives products and the riskiest parts of them are often sold to hedge funds. Disturbances in the leveraged loan market could therefore also trigger spill-over effects via the aforementioned “triangle”.