"Zaitech"

Economist Ed Yardini adds an important new risk to his risk list:

"(3--new item) “Zaitech” (Financial Engineering): The concern is that abundant and cheap credit is fueling the private equity bonfire. More than five years into the current economic expansion, company balance sheets are becoming increasingly leveraged with debt. This is bound to exacerbate the next recession, which will eventually occur.

Larry Fink, BlackRock’s chief, told the FT (4/26) that “[l]enders to highly indebted companies are making the same mistakes that undermined the US subprime mortgage market.” So the leveraged loan market is likely to become “tomorrow’s problem.” According to the WSJ (3/31), “covenant-lite” loans--with few provisions that protect debtholders--are increasing rapidly. High-yield loan lending rose 65% to a record $216 billion in Q1, as leveraged buyouts fueled the demand for such financing. Reuters reported that loans without any “maintenance financial covenants,” which restrict the amount of additional debt that is permitted, reached a record $29 billion in the last quarter. This is a relatively small amount, but may be a harbinger of much more Zaitech ahead. This is more likely to keep the economic boom and equity bull market going for now than to lead to an imminent bust. More than $4 trillion in M&A deals occurred in 2006. By early May of this year, there were already over $2 trillion. April was the busiest month in history for such deals.