Why investors continue to exit from leveraged loans funds
Overview: U.S. bonds weekly primary and seconday markets update (Part 6 of 8)
Leveraged loan issuance in the primary market for the week ended June 6
Last week, the total number of deals in the leveraged loans (BKLN) space went up to 16, from ten the previous week. The total amount of leveraged loans (SNLN) issuance was also up to $9.1 billion from $4.7 billion. There were eight Collateralized Loan Obligations (or CLO) deals totaling $5.4 billion, last week. Last week’s figures bring the total number of CLO deals in 2014 to 96, for issuance amounting to $52.2 billion (source: S&P Capital IQ/LCD).
Secondary market activity: Flows outward bound
Net flows into leveraged loans (SRLN) mutual funds continued to trend negative. Last week, $1.1 billion was pulled out of leveraged loan mutual funds—the highest since August, 2011. This represented an increase of over 100% over the previous week, when fund outflows totaled $475 million. This also marked the fourth consecutive week of net outflows for leveraged loans mutual funds. However, net flows for the whole 2014 are still positive at $3.6 billion (source:Lipper).
Floating rate debt like leveraged loans, provides a hedge against the prospect of rising interest rates. It appears that investors don’t need the hedge, currently, because the Fed has indicated that low rates are likely to stay even after it achieves its dual mandate of price stability and full employment. Besides, with yields declining for fixed-rate debt, other bond sub-classes have performed better than leveraged loans, as bond prices increase as yields decline. These factors have probably pulled investors from leveraged loans to alternative forms of bond investments.
Year-to-date (or YTD) returns on the S&P and LSTA U.S. Leveraged Loan 100 Index have come in at 2.16% (as on June 11). For the week ending June 6, the Index increased by 0.15%. In comparison, the Invesco PowerShares Senior Loan Portfolio (BKLN) and the Pyxis and iBoxx Senior Loan ETF (SNLN) returned 1.47% and 1.64% YTD (through June 10) respectively, while returns on the iShares Core S&P 500 ETF (IVV) which tracks the S&P 500 Index, returned 4.89% in 2014 YTD. The S&P 500 Index touched a new record high last week, finishing at 1949.44 on Friday.
Major transactions
Prominent deals in the leveraged loans space included lodging Real Estate Investment Trust (or REIT) Ryman Hospitality Products’ (RHP) $400 million senior secured term loan, issued for refinancing its existing revolver commitments. The Ba3 and BB rated debt was issued at LIBOR+3%, with a floor at LIBOR+0.75%.
In the next section, we’ll analyze deals and volumes in the investment grade corporate debt market for the week ending June 6.
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