Fed issues more warnings on danger of high-risk company debt

The Federal Reserve has escalated its warnings about the dangers of risky borrowing by businesses, saying firms with the worst credit profiles are the ones taking on more and more debt.

The U.S. central bank’s latest financial stability report said leveraged-lending issuance grew 20% last year, and protections included in loan documents to shield lenders from defaults are eroding. While the Fed board voted unanimously to approve the report, it didn’t indicate any course of action the governors might take to rein in the red-hot market.

A particular concern is that businesses that employ thousands could face severe financial stress and, in some cases, insolvency in an economic downturn. One group that has frequently discussed the market and is arguably the best positioned to take action is the Financial Stability Oversight Council, a U.S. panel of regulators tasked with looking out for hazards.

The Fed said that credit standards seem to have slipped since it issued its last financial stability analysis in November 2018. The central bank added that loans to firms with especially high debt now exceed earlier peaks in 2007 and 2014.

“The historically high level of business debt and the recent concentration of debt growth among the riskiest firms could pose a risk to those firms and, potentially, their creditors,” the Fed said.

Still, it noted that default rates have been low amid a booming U.S. economy. Fed officials also pointed out that the $1.2 trillion leveraged lending market is much smaller than the mortgage sector that nearly brought down the financial system in 2008.