After dipping to recent lows late last year, yields on U.S. leveraged loans have risen to their highest level since the first quarter of 2016, as investors try to digest massive amounts of new issuance seen over the past few months and begin to push back on some aggressively structured deals.
At the end of June, the average yield to maturity for leveraged loans rated B+ or higher jumped to 5.39%, from 4.94% in May, according to LCD. For lesser-quality loans – those rated B/B2 – the yield to maturity jumped to 6.5% from 6.12% in May.
These numbers detail new-issue yield to maturity on leveraged loans entering the U.S. secondary market.
The jump in yields last month was solely a function of market dynamics, as opposed to an increase in LIBOR, the rate over which these credits are priced. Three-month LIBOR increased from 1.69% at the start of 2018 to 2.36% by the end of April, but has held roughly steady since. This means the increase in yields on offer to investors in June is a direct result of an increase in a loan’s spread over LIBOR (and/or its offer price).
About that surge of loan issuance: The volume of new loan paper entering the U.S. trading market last month slowed little from the torrid pace in May. In June, $50.7 billion entered the market, down just $800 million from the previous month, and well above the $36.4 billion average through the first five months of 2018, according to LCD. That $50.7 billion in June was via 95 deals, compared to 106 in May.
That supply surge has allowed weary investors to push back against aggressive deals. Indeed, the number of loans that had pricing changed during syndication to favor investors in June outnumbered those changed to favor borrowers for the first time since February 2016, according to LCD. – Staff reports
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