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Why leveraged loans aren’t a win-win for issuers and investors

Phalguni Soni

Overview: The week in corporate bonds—the rate hike (Part 6 of 9)

(Continued from Part 5)

Major transactions in the leveraged loans primary market last week

The more prominent deals in the leveraged loans (SRLN) space involved debt issuance for the purpose of funding acquisitions and refinancing existing debt. Gates Global issued a c. $2.8 billion term loan that was denominated in multiple currencies. The debt will be used to finance part of the Blackstone Group’s (BX) $5.4 billion leveraged buyout (or LBO) of Gates Global. Blackstone will acquire the Gates Global from Onex Corp. and the Canada Pension Plan Investment Board.

Other debt issues to fund acquisitions included Gray Television’s $525 million term loan. Part of the debt proceeds will go into funding Gray’s purchase of 15 TV stations from Hoak Media and Parker Broadcasting, with the balance earmarked for refinancing the company’s existing debt.

Secondary market activity: Outflows continue from leveraged loan mutual funds

If the c. $1.1 billion outflow from leveraged loan (SNLN) mutual funds in the week ending June 6 raised some eyebrows, last week’s outflows were even greater, with c. $1.2 billion being pulled out of leveraged loan (BKLN) mutual funds. This was the fifth straight week of net outflows for leveraged loan mutual funds, bringing the total year-to-date (or YTD) net inflows to c. $2.4 billion. Leveraged loan mutual funds have seen net outflows in eight out of 11 weeks in the current quarter.

YTD returns on the S&P and LSTA U.S. Leveraged Loan 100 Index have come in at 2.25% (as on June 18). For the week ending June 13, the index increased by 0.13%.

The leveraged loans dilemma

Leveraged loans are basically issued on a floating rate basis. Without the prospect of an imminent rate hike, issuers continue to take advantage of low and declining rates in the primary market. The collateralized loan obligation (or CLO) market in particular, has been highly active in 2013 and 2014. Investors on the other hand, wouldn’t benefit from a declining rates scenario and are pulling funds out of mutual funds at a record rate.

In the next section, we’ll analyze the key trends in corporate investment-grade bond (LQD) issuance in the week ending June 13. Please continue reading the next section in this series.


Continue to Part 7

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