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Why leverage loan issuance surged in the primary market

Phalguni Soni

Why high-yield debt market borrowers set new records in 2014 (Part 5 of 6)

(Continued from Part 4)

Leveraged loan issuance in the primary market for the week ended July 4

The week ending July 4 saw a total of $21.3 billion issued in the leveraged loans (BKLN) primary market in 14 transactions. Compared to the previous week, issuance volumes were up, while the number of deals were down.

In the week ending June 27, there were 21 deals in the leveraged loans (BKLN) primary market with issuance coming in at $14.3 billion (Source: S&P Capital IQ/LCD).

 

June marks record month for Collateralized Loan Obligation deals

There were five Collateralized Loan Obligations (or CLO) deals totaling $2.8 billion, compared to five deals with issuance volumes of $2.5 billion, in the week ending June 27. Last week’s figures bring the total number of CLO deals in 2014 to 118, for an issuance of $63 billion (Source: S&P Capital IQ/LCD).

June also marked a record month for CLO deals with $13.8 billion issued over 25 transactions. The demand for CLOs has increased lately due to their ability to slice and price risk into tranches. Investors with higher risk appetite would go for a lower-rated tranche, with the expectation of higher returns. An investor with a low-risk profile can gain exposure to a higher-rated tranche, but with lower return expectations.

What are leveraged loans?

A leveraged loan is a commercial loan provided by a group of lenders. Typically secured, the loan is structured, arranged, and administered by investment and commercial banks, or the arrangers. Examples of these banks include Citigroup and JPMorgan. It’s then syndicated to other banks or institutional investors. The interest rate on leveraged loans is floating rate and paid as a spread over an interest rate benchmark, such as LIBOR. Interest rates on leveraged loans are usually paid at or above LIBOR + 1.25%. Both Citigroup and JPMorgan are part of the S&P 500 Index (SPY) and the SPDR Financial Select Sector ETF (XLF).

Leveraged loans are issued by companies rated below investment grade—for example, Intelsat SA and HJ Heinz. The Invesco PowerShares Senior Loan Portfolio (BKLN) is an example of an exchange-traded fund (or ETF) investing primarily in leveraged loans. The company’s holdings include debt issued by both Intelsat SA and HJ Heinz.

ETFs like the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and the SPDR Barclays Capital High Yield Bond ETF (JNK) also invest in high-yield debt issued by corporates, but the rate of interest is usually fixed-rate as opposed to floating rate for leveraged loans.

In the next section, we’ll discuss the major deals in the leveraged loans primary market including the rationale for funding decisions. Please continue reading the next sections in this series.

 

Continue to Part 6

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