Amid mixed corporate earnings and more flashing-siren headlines about the market, U.S. leveraged loans lost 0.12% today after slipping 0.04% yesterday, according to the S&P/LSTA Leveraged Loan Index. A 12 bps daily drop for the usually less-volatile loan asset class is relatively steep.
Loan returns are –0.09% month to date and a comparatively strong 3.91% YTD.
To be sure, it was a buyer’s market today, with sell interest in the secondary swamping bids for leveraged loan paper, according to the Bank of America Merrill Lynch Instinct Loans Market Monitor, a trading platform.
The big news recently, of course, was Sen. Elizabeth Warren on Wednesday calling out the leveraged loan market in a letter to federal regulators, citing as areas of concern covenant-lite loans and the booming collateralized loan obligation (CLO) market. Warren became the latest in a series of high-profile criticisms of the asset class over the past month or so. As did others, Warren pointed to events in 2008, leading up to the financial crisis, as one reason for concern about today’s long-running bull credit market. These headlines have contributed to a slowdown in investments in the market, managers say.
How concerning the recent market direction is can be up to some debate. The Loan Syndications & Trading Association, a trade organization for the asset class, responded yesterday to recent concerns regarding leveraged loans, pointing out, among things, that
- Today’s market, despite its $1 trillion-plus record size, has grown at a relatively modest pace since 2007-08
- Overall speculative-grade corporate leverage is lower now than before the financial crisis
- Pre-crisis CLOs performed extraordinarily well after the financial crisis (these vehicles often are conflated with their second cousin, the CDO, whose role in the crisis offers far less opportunity for debate)
You can read Sen. Warren’s letter to regulators here, and the LSTA’s commentary on recent concerns about the market here.
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