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Leveraged Loans: As Cash Inflows Ease, Issuer-Friendly Market Trends Toward Equilibrium

Market pros see leveraged loan default rate holding at low levels

S&P: BBB downgrade risks in Europe look manageable

As specter of rate cuts grows, investors retreat from leveraged loan asset class

Retail investors flock to US high yield bond funds with $1.8B inflow


Leveraged Loans: As Cash Inflows Ease, Issuer-Friendly Market Trends Toward Equilibrium

leveraged loan supply shortage

The U.S. leveraged loan market, which saw booming activity in the first quarter of 2017, as issuers took advantage of huge investor cash inflows to market, is showing signs of cooling.

The amount by which the supply of deals available in market was outweighed by investor demand for that paper dipped to $5.6 billion in April, according to LCD. While that’s still a considerable amount, this is the third straight month that demand has eased (albeit from a whopping $14.2 billion in January).

Any market rebalance would be welcome by institutional investors, who have been under siege this year from leveraged loan issuers looking to cut interest rates on existing deals (sometimes on credits put in place only months ago). Indeed, repricing activity topped an astronomical $100 billion in January

Why the demand surge? Since the third quarter of 2016 investors have been pouring cash into U.S. loan funds and ETFs amid expectations of regular interest rate hikes, finally, in 2017 (of course, as rates rise, floating-rate asset classes such as leveraged loans tend to fare well).

Lately, however, those cash inflows to market have slowed as a second – and especially third – rate hike in 2017 look less of a sure thing than they did earlier this year due to a recent dip in inflation and inflation expectations. – Staff reports

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This story first appeared on www.lcdcomps.com, an offering of S&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.