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US Leveraged Loan Market Grows to Another Record in June: $1.05T

us leveraged loans outstanding

The U.S. leveraged loan market in June hit its sixth record amount in as many months, totaling $1.05 trillion, according to the S&P/LSTA Leveraged Loan Index.

The U.S. loan market has grown dramatically since the financial crisis, by some 75%. It now comprises more than 1,000 issuers. In the past few years that growth has been driven both by institutional investors and by retail investors. On the institutional side, issuance of collateralized loan obligtation vehicles has skyrocketed, while retail investors have flocked to loan funds and leveraged loan ETFs over the past few years.

Overall, interest in the market has increased due to expectations of continued rate hikes by the Fed. A rising rate environment tends to boost interest in a floating-rate asset class such as leveraged loans. – Staff reports

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Fixed-Income: Reverse-Yankee High Yield Bond Issuance Soars

reverse yankee

Speculative-grade debt issuers from the U.S. tapped the European high yield bond market at a record pace in 2018’s first half, taking advantage of decidedly cheaper financing costs in that market.

During the first six months of the year there was €8.2 billion of this ‘reverse-Yankee’ activity, an increase from €5.6 billion in 2017’s second half, and well up from levels seen in 2010 through 2014, according to LCD.

Why the surge in reverse-Yankee activity?

single b yields

Simply put, the European high-yield market, via euro-denominated deals, is a less-expensive financing option for U.S. issuers. For lower-rated companies, for instance – issuers rated single B – Europe has during the first half of the year offered financing that averages 156 bps cheaper than in the U.S., according to LCD. That’s up from a 125 bps difference in 2017’s first half.

This analysis was excerpted from a story on LCD News by Luke Millar.

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After 19 Weeks and $8B, US Investors Take Pause from Leveraged Loan mart

US loan funds

U.S. loan funds recorded an outflow of $184 million for the week ended July 4, according to Lipper weekly reporters only. This exit snaps a 19-week inflow streak totaling roughly $7.9 billion.

Last week’s exit was driven by a $198.5 million outflow from ETFs, while $14 million flowed into mutual funds.

The year-to-date inflow total dipped modestly to $8.4 billion.

The four-week trailing average narrowed to $198 million, from $349 million last week, marking its twenty-fourth consecutive week in positive territory.

Total assets edged up slightly to $104.45 billion at the end of the observation period, indicating the highest level since the week ended Aug. 20, 2014, when total assets were $104.6 billion.

The change due to market conditions this past week was an increase of $201 million. ETFs represent about 12.6% of total assets, at $13.2 billion. — James Passeri

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High Yield: US Bond Issuance Hits June Swoon as Borrowers Eye Loan Market

US high yield issuance

With issuers continuing to flock to the floating-rate leveraged loan market, U.S. issuance of fixed-rate high yield bonds slid to $14.5 billion in June, the third straight monthly decline and the lowest level for this time period in five years, according to LCD.

During 2018’s first half, U.S. high yield issuance was $110.6 billion, down 23% from the same period in 2017.

Would-be high yield investors and issuers have turned to the leveraged loan market amid expectations of continued interest rate hikes by the Fed and as LIBOR – the rate over which leveraged loan borrowing costs are based – has climbed throughout much of 2018. Both of these factors have boosted investor interest the floating rate class.

This story was excerpted from analysis by LCD’s Jakema Lewis

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Market Pros: US Leveraged Loan Default Rate to Remain Low, but Creep Higher

us default forecast

Portfolio managers of U.S. leveraged loans expect default activity to continue its modest ascent over the next 18 months, with the long-anticipated spike above historical averages materializing in 2020, according to LCD’s latest buyside poll.

On average, managers predict the one-year-forward default rate of the S&P/LSTA Index to finish June 2019 at 2.46%, up slightly from the previous one-year-forward prediction of 2.43% polled in March, versus the current default rate by amount of 1.95%.

Managers, in the near term, say they continue to see idiosyncratic risk as the main driver of loan defaults, rather than a broad-based uptick at a systemic level.

Conducted in June before the end of the second quarter, LCD’s Default Survey also asked portfolio managers their predictions on the loan default rate at the end of 2019. The consensus estimate was 2.65% by then, a slightly more bullish read this time around, with managers reining in the forecast from 2.81% at the March reading (but keeping it close to their 2.64% prediction from December).

Historically, U.S. leveraged loan defaults have averaged roughly 3.1%.

The default rate has been of particular scrutiny over the past year or so for two important reasons. First, the current, borrower-friendly credit cycle is approaching its 10th year, an unusually long stretch. And, related, with the ubiquitousness of loosely structured covenant-lite loans in today’s market, many observers are concerned that, once the credit cycle does turn, defaults could pile up quickly, as traditional protections for lenders/investors – a set of covenants – no longer are routinely structured into loan agreements. – Rachelle Kakouris

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Leverage Loan Returns Sink in Europe as Investors Shift Focus Within Segment

europe leveraged loans

In June, the European secondary loan market experienced its worst returns in two years. However, unlike in June 2016 — when the market was reacting to a geopolitical event, namely the U.K.’s Brexit vote — this year the trigger was market-driven, with secondary prices tumbling as loan investors rotated out of lower-priced names to take advantage of higher yields amid a rapidly repricing primary market.

As a result of steep secondary price declines, the S&P European Leveraged Loan Index (ELLI) lost 0.43% last month — the first time this measure has been in the red this year, and the worst performance since the 0.60% loss recorded in June 2016. The first five months of 2018 delivered positive (albeit unspectacular returns), averaging 0.27% per month (excluding currency fluctuations). For the year through June 30 the ELLI was up 0.90%, a far cry from the 2.65% gain racked up in the first half of 2017. – Marina Lukatsky

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