Long-suffering investors in the $1 trillion U.S. leveraged loan market saw some relief in 2018’s second quarter, as the reward for participating in LBO loans, vs the risk incurred, hit its highest level in six years, according to LCD.
For this analysis LCD employed yield per unit of leverage (YPL) to gauge risk/reward, and looks only at loans backing LBOs.
Specifically, in the second quarter, U.S. loan investors saw an average 126 bps of YPL on LBO loans offered in the syndications market, up sharply from 95 bps in the first quarter. To calculate YPL, the yield to maturity of a credit is divided by the deal’s total leverage (debt/EBITDA).
It’s important to note that this increase was almost entirely a result of higher credit spreads in the market, as opposed to an increase in LIBOR, on which U.S. loan pricing is based (three-month LIBOR climbed steeply in Q1, but largely held steady in Q2).
The brighter risk/reward scenario for U.S. loan investors came as cash inflows from retail players – via loan funds and ETFs – slowed, compared to heavy net deposits earlier in the year. The relative slowdown, combined with a hefty $25 billion of LBO loans entering the market in May and June, had investors in the rare position of calling some shots during the syndications process in July, forcing increasing numbers of issuers to sweeten pricing and/or alter terms. Hence the notable increase in YPL (and spread per leverage).
After a slow start, however, loan issuance in the latter half of July has picked up, with issuer-friendly price flexes resuming, so it will be interesting to see how the risk/reward profile in the leveraged loan market shifts going forward. – Staff reports
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