“Banks involved in loan syndication can be vulnerable to significant and sustained market dislocations, which could force them to keep the loans on balance sheet and potentially lead to increased losses and/or writedowns,” said Fitch. “However, balance sheet risk appears manageable, as Fitch estimates leveraged loans account for approximately 5% of banks’ loan portfolio exposure. That said, U.S. banks do not typically publicly disclose leveraged loan holdings on their books, and the definition of leveraged loans varies across individual financial institutions.”

The late stage of the credit cycle and rising leverage among borrowers are among the other issues investors should consider in the bank loan market.

Those issues “can be partially offset if rates are rising as a result of sustainable economic growth, which could benefit corporate revenues and EBITDA. The institutional leveraged loan default rate was 1.8% through the trailing 12 months ended November 2018. Fitch currently forecasts a 2019 default rate at 1.5%, which would be the lowest since 2011,” notes the ratings agency.

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