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US Leveraged Loan Mart Supply/Demand Imbalance Might be Here for a While: LSTA

U.S. leveraged loan market players could well spend much of the next 12 months dealing with a familiar, vexing issue—a supply/demand imbalance that already has characterized the market for more than a year—according to a survey of Loan Syndications and Trading Association board members.

LSTA survey 9.17

Per the survey, released today, LSTA board members by a wide margin think technicals, more than any other factor, will have the biggest impact on the loan market over the next year. This concern was especially pronounced on the buyside, which is focused on the supply/demand imbalance, and the lower spreads/weaker deal structures that an intense struggle for loan paper can bring about.

Indeed, when asked what their biggest fear in the coming year was, some 70% of buysiders cited “Technicals/Credit Quality,” while roughly 60% of sellside respondents said an “Exogenous event” was most concerning (we’ll note that this survey was concluded on Aug. 22, before the most recent doings in North Korea).

What does the market hope will happen in the next year?

It will come as no surprise that buysiders would like to see the supply/demand picture even out (more than 50% put that atop their wish list), while some 30% would like to see more rate hikes. The sellside? About half the respondents would like to see the trading and settlement process become more efficient (and some “regulatory relief” wouldn’t hurt either, apparently).

About that market demand: The majority of the LSTA board sees full-year 2017 CLO issuance totaling $80–90 billion, roughly in line with a number of banks on the Street that upped 2017 expectations after better-than-expected issuance earlier in the year, punctuated by the $15 billion of activity in June and $12 billion last month. Year to date, U.S. CLO issuance totals nearly $73 billion, according to LCD.

Also of note, per the survey:

  • Loan fund AUM likely will be flat/up slightly by year-end.
  • By a small margin, respondents think B+/B spreads will be down some 10% by year-end (that figure currently is L+385, according to LCD).
  • We mentioned near-term disruptions already. Longer-term (five years down the road), buysiders see a recession/weak recovery as the biggest potential threat, followed by geopolitical concerns; the sellside, by a wide margin, is concerned about regulation.

The full version of the LSTA Board Survey is available at the LSTA website. — 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.

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