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Leveraged Loan Coffers Grow as Investors Eye Rate Hike, Trump Presidency

loan fund assets

Assets at U.S. loan funds rose by $2.84 billion in October, to $121.2 billion, as investors continued to pour money into the market.

The primary reasons for the ongoing investor bullishness regarding loans: A Fed rate hike later this month – which would bolster a floating-rate asset class such as loans – appears all but a done deal, and investors appear keen to bank on increased spending/inflation accompanying a Trump presidency.

This marks the fourth straight monthly gain for the asset class, for a total of $9.7 billion, according to Lipper. Since February, assets at U.S. loan funds have risen by nearly $14 billion.

The two main technical drivers of this asset growth will be familiar.

The first: loan funds saw a net inflow of $1.65 billion in October, according to weekly reporters to Lipper. That’s the fourth straight monthly gain, and is the largest since the $1.9 billion inflow in February 2014.

The second: Buoyed by the steady stream of cash flowing into loan funds and ETFs, prices in the secondary continued to rise in October, jumping by a hefty 205 bps during the month, according to the S&P/LSTA Leveraged Loan Index. (Note: some of that increase was due to credits exiting the Index).

As prices on loans increase, of course, their asset value rises. – Tim Cross

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US Leveraged Loan Funds See Whopping $1.12B Investor Cash Inflow

U.S. leveraged loan funds recorded an inflow of $1.12 billion in the week ended Nov. 23, according to the Lipper weekly reporters only. That nearly doubles the $673 million from the prior week and marks the largest inflow into the asset class since the week ended Sept. 18, 2013 ($1.33 billion).

US loan funds

Loan funds have been on a tear in the second half of the year. Inflows were recorded in 19 of the last 22 weeks for a total inflow of $5.78 billion during that span. Over the first 26 weeks of 2016 the cumulative outflow was $5.565 billion, with 18 negative weeks against just eight positive readings.

As such, the year-to-date figure swung positive with last week’s result, at $212.5 million, versus a total outflow of $906.2 million as of Nov. 16. That’s based on outflows of $2.7 billion from mutual funds against inflows of $2.9 billion to ETFs, according to Lipper.

ETF flows were 36% of the total last week, but logged their highest ever inflow by volume of $406.2 million. For mutual funds, the $712.4 million was the largest weekly inflow since January 2014.

With this large inflow, the four-week trailing average jumped to positive $471.5 million, from $264.5 million in the week prior.

The change due to market conditions this last week was positive $120.3 million, the largest increase in five weeks. Total assets were $70.56 billion at the end of the observation period. ETFs represent about 17% of the total, at $12.1 billion. — Jon Hemingway

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KKR Prices Hefty $711M CLO; YTD US Issuance: $60B

Citi today priced a $711.3 million CLO for KKR Financial Advisors II LLC, according to market sources. This is the manager’s third U.S. CLO of the year, which was upsized from $509.05 million originally.

An affiliate of the manager is expected to retain a majority of the subordinated notes, according to a presale report from Fitch Ratings analysts.

Pricing details are as follows:

Up to 60% of the loans in the portfolio can be covenant-lite, according to Fitch.

The transaction will close on Dec. 15 with the non-call period running until Jan. 20, 2019 and the reinvestment period until Jan. 20, 2021. The legal final maturity is on Jan. 20, 2029.

Year-to-date issuance is now $60.44 billion from 132 transactions, according to LCD data. November issuance is now $5.94 billion from 12 CLOs. — Andrew Park

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Leveraged Loans Gain 0.06% Today; YTD Return: 8.63%

Loans gained 0.06% today after gaining 0.03% on Friday, according to the LCD Daily Loan Index.

The S&P/LSTA US Leveraged Loan 100, which tracks the 100 largest loans in the broader Index, gained 0.09% today.

In the year to date, loans overall have gained 8.63%.

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As Junk Bonds Take Hit, Leveraged Loan Funds See Big Cash Inflow

U.S. leveraged loan funds recorded an inflow of $666.3 million in the week ended Nov. 16, according to the Lipper weekly reporters only. This is the largest inflow since the week ended Feb. 26, 2014 when the inflow was $673 million.

US loan funds

This is a strong answer to last week’s mild $45 million outflow. There have now been inflows in 15 of the last 16 weeks for a total of $4.49 billion over that span.

This is in contrast to the high yield bond market, of course, which saw another big cash withdrawal this week. 

The four-week trailing average for loans rises to positive $264.5 million, from $226.6 million last week.

ETF flows were just $10.6 million of the total this week, with $655.7 million flowing into mutual funds.

Year-to-date outflows from leveraged loan funds now total $906.2 million, based on outflows of $3.4 billion from mutual funds against inflows of $2.51 billion to ETFs, according to Lipper.

The change due to market conditions this past week was positive $42.25 million, snapping two straight weeks of declines. Total assets were $71.73 billion at the end of the observation period. ETFs represent about 16% of the total, at $11.66 billion. — Jon Hemingway

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BNP Prices $504M Symphony CLO; YTD US Volume: $58.5B

BNP Paribas yesterday priced a $504 million CLO managed by Symphony Asset Management, according to market sources. This is the third CLO of the year from the manager when also including the manager’s involvement as sub-advisor on a CLO with a risk-retention fund affiliated with Tetragon Financial in September.

Pricing details are as follows:

Up to 80% of the loans in the portfolio can be covenant-lite, according to a presale report by Moody’s analysts.

The transaction will settle on December 12 with the non-call period running until July 2019 and reinvestment period ending on July 2021. The legal final maturity is on January 2028.

Year-to-date issuance is now $58.51 billion from 129 transactions, according to LCD data. This is the ninth CLO in November for a total of $4.01 billion on the month. — Andrew Park

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Demand for US Leveraged Loans Swamps Supply by $6B in October

supply v demand - leveraged loans

Demand from loan investors overwhelmed supply for the fourth consecutive month in October as cash poured into funds and ETFs while CLO issuance matched its impressive September total.
By the numbers, demand topped supply by $6 billion in October, according to LCD.

While that’s down from $9 billion in September and from the whopping $12 billion in August (the most since June 2015), it roughly matches the $6.5 billion surplus in July. All told, demand has swamped supply by an average of $8.4 billion over the past four months.

The usual suspects were at work.

Inflows to U.S. loan funds and ETFs totaled a net $1.65 billion last month, the most since March 2014, according to Lipper, as investors kept one eye on the roller-coaster U.S. electoral process  and the other on interest rates, amid firming expectations of a Fed hike in December.

Another factor on the demand side: CLOs once again had a good month, with $8.41 billion in new vehicles in October, the most since June 2015, and just topping the healthy September figure. – Tim Cross

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US Leveraged Loan Fund Inflow Streak Ends at 14 Weeks

US loan funds

U.S. leveraged loan funds recorded an outflow of $45.4 million in the week ended Nov. 9, according to the Lipper weekly reporters only. This is the first outflow since the week ended July 27, snapping a 14-week run of inflows that totaled $3.87 billion during that period.

The four-week trailing average drops to positive $226.6 million, from $341.8 million last week.

ETF flows were positive, at $53.3 million, against outflows from mutual funds of $98.7 million.

Year-to-date outflows from leveraged loan funds total $1.57 billion, based on outflows of $4.1 billion from mutual funds against inflows of $2.5 billion to ETFs, according to Lipper.

The change due to market conditions this past week was negative $82.5 million, marking the first two-week decline since June. Total assets were $70.62 billion at the end of the observation period. ETFs represent about 16% of the total, at $11.64 billion. — Jon Hemingway

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The Day After, US Leveraged Loan Lose Slight 0.05%

Loans lost 0.05% today after gaining 0.02% yesterday, according to the LCD Daily Loan Index.

The S&P/LSTA US Leveraged Loan 100, which tracks the 100 largest loans in the broader Index, lost 0.07% today.

In the year to date, loans overall have gained 8.35%.

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Europe/Trump: Bankers Optimistic on Primary Issuance as Markets Pare Early Losses

European markets are shrugging off their knee-jerk reaction to Trump’s victory in the U.S. Presidential Election, with many asset classes now starting to pare their early losses.

Credit seems to be slightly outperforming equities, and leveraged finance traders say that while secondary prices were marked down a point or more early in the session, the lack of actual selling has seen prices recover. Moreover, bankers are optimistic that primary activity in Europe will be largely unaffected by the result.

Equity markets reacted fastest and hardest to the news. The Nikkei shed nearly 5.5%, illustrating how bearish the market tone was first thing. The FTSE 100 initially fell more than 100 points, but is now slightly in the green, while the Eurostoxx was down more than 2%, and is now just 1% in the red.

All eyes will now be on the U.S. market open, and here the futures are indicating a sharp move south. The Dow Jones Industrial Average is forecast to open more than 300 points, or roughly 2%, lower (note though, that as reported the futures market was projecting a 400-point fall earlier this morning).

Safe-haven assets meanwhile are seeing their rally fade a little. The Bund yield was five basis points tighter earlier in the session, but is now two basis points tighter, at 17 bps. The gold price is up 2.25%, having been roughly 2.5% higher in early trading.

The iTraxx Crossover is a touch wider than at the open, having now moved out 12 bps to 338, but secondary prices show credit is outperforming equities. Indeed, loan traders across the board say the market opened a little softer, but has now reversed its losses, and there were no forced sellers.

If anything, market participants are frustrated that their hoped-for buying opportunities did not materialize. “Not many sellers are appearing, and we were hoping for some opportunities,” commented one trader. “Some loans were initially down a quarter- to half-point, but quickly got back to where they were, and offers are static because there’s a queue of people looking to buy paper.”

“Loans were half a point down, but are now back to where they were last night,” confirms another market participant. “U.S. equity futures are down, but that was all very short-lived, and now high-yield is back to normal. We are even seeing some investors that have gone in this morning looking for bargains, but are now having to lift offers.”

High-yield secondary players paint a similar picture. “Initially we saw the Street trying to mark prices down, but there has been limited trading at lower levels,” said one buysider. “There is no panic-selling, and everything is very measured and orderly. Prices are coming back now, and any trading is not far off yesterday’s closes as credit outperforms equities. You have to remember too that we have CSPP and CBPS, which limits any widening. Given how muted the market reaction is, it wouldn’t surprise me to see issuance quite soon.”

As for primary, all eyes will now turn to the cross-border loan financing from Genesys, which held bank meetings on Monday and Tuesday, but has deliberately waited for the outcome of the U.S. election to release price guidance. Meanwhile in the bond market Perstorp is also out with a cross-border offering. It is roadshowing until next Monday, and so has plenty of time to gauge the market reaction.

As to whether more new issues will follow, bankers sound fairly confident that just like secondary, concerns will be shrugged off quickly — in the short-term at least. Earnings season may keep a lid on high-yield supply in the near term, while bankers suggest that how rates move in response will be a key factor in year-end supply.

“I don’t think the result has a big impact on the market’s ability to do deals, but the big question will be what happens to rates, as I would expect most pre-year-end issuers to be sensitive to double-Bs and rates,” comments a banker.

Meanwhile loan bankers are optimistic that the near-term pipeline remains in place, but admit it’s too early to truly gauge how supply will impacted. “Generally I agree that the loan pipeline should continue to come through, though I think it’s too early to really tell,” said one banker. “European credit is still well-bid, but we will have to see when the U.S. shows up. I think loan deals can still go ahead, though transactions might require some tweaks to pricing.” — 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.