Assets at U.S. leveraged loan funds now total $156.7 billion, the most since September 2014, according to Lipper and LCD.
Despite the relatively lofty figure, asset growth at loan funds has slowed dramatically over the past few quarters, as the outlook for additional rate hikes by the Fed – which benefit a floating-rate asset class such as leveraged loans – has dimmed.
Indeed, loan fund AUM grew by a total of $600 million over the past two months, and have averaged growth of $620 million over the past four months, according to Lipper. Before that period, from December 2016 through May 2017 – when the outlook recording rate hikes was more bullish – loan fund AUM grew by an average of $5 billion each month.
Even with the slowing growth, investor demand for leveraged loan paper continues fierce, resulting in lower yields and riskier deals. Just last month the share of covenant-light loans – credits with restrictions that more resemble junk bonds than loans – hit an all-time high of 73%, according to LCD.
That demand is largely courtesy retail investors, which have put a net $14 billion into loan mutual funds and ETFs so far this year, according to Lipper. Also contributing to demand: Issuance of CLOs has rebounded to $92 billion so far this year, compared to only $52 billion at this point in 2016, according to LCD.
CLOs are special-purpose vehicles set up to hold and manage pools of leveraged loans. They currently account for some 60% of the roughly $950 billion U.S. leveraged loan market. – Tim Cross
This story was excerpted from a full analysis 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.