Must-read: Impact of re-investment risk on leveraged loans

Market Realist

Leveraged loans continuing to plow ahead (Part 2 of 3)

(Continued from Part 1: What’s driving the 240% increase in leveraged loan volume?)

The new issue yields in leveraged loans (BKLN) contracted significantly over the past week, partially driven by the refinancing activity and partially driven by the strong investor appetite towards the asset class

A refinancing is when a company raises a new loan from new investors to repay an old loan to old investors, while a repricing is when a company agrees a lower interest rate with the existing group of investors without extending the maturity 1 . Why would investors agree to simply lower the price? Reinvestment risk, which means institutional investors would rather stay invested in the deal at a lower interest rate than finding a new deal to invest in.

Flows denote strong appetite

The strong investor demand for leveraged loans has kept a steady inflow of funds into the asset class. Last week, inflows into leveraged loan (BKLN) funds set a new all-time high, with an inflow of $1.87 billion, breaking the previous record of $1.85 billion from just two weeks ago.

Year-to-date inflows are above $35 billion—more than triple the $10 billion for all of 2012. Actually, the leveraged loan market has attracted positive inflows into the market for over a year now (60 weeks, to be exact).

  1. When maturity is extended, the transaction is referred to as an amend-to-extend (A-to-E) and the issuer pays a fee (for example, 0.5%) to the investors

Continue to Part 3: How to play Fed rate risk with bonds

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