Are We Back to 2007? (First of a series)

What is the scariest sentence in the English language? If you’re a parent dropping off your four-year old at summer camp (as we did last Friday), a good candidate is, “Daddy, today we’re learning archery!”

For bankers monitoring leveraged markets these days, it seems like the equivalent phrase of fear is, “We are back to 2007.” The concern, of course, is not just toppy markets, but extreme behavior that leads to another credit apocalypse.

Unlike our daughter’s revelation, this worry has been bruited about for a while.

Loan bubble-phobia originates as far back as 2011. That was the second full year of recovery after the credit crisis. It also marked the return of leveraged volume to nearly pre-crisis levels. New-issue institutional loans totaled $376 billion (all data courtesy S&P/LCD), then the third-highest year in market history after 2006 ($475 billion) and 2007 ($529 billion).

2011 was also the year mega-deals made a comeback. Eleven leveraged transactions between $2-5 billion were completed, compared with only two the year before. Finally, covenant-lite deals, always a bull market’s canary in the coal mine, jumped from $8 billion in 2010 to $57 billion in 2011.