Faced with a less-certain picture regarding rate hikes and U.S. economic growth, institutional investors pulled cash out of the U.S. loan funds in August, according to Lipper.
While the withdrawal was relatively small, at $490 million, it is the first retreat for the asset class since June 2016, when investors began to flock to the market in anticipation of rate hikes by the Fed (floating-rate assets such as leveraged loans are attractive in a rising rate environment).
Indeed, before the August pause, investors had poured a net $14.3 billion into loan funds, according to Lipper, contributing to intense competition for new issuance in the sectors, resulting in record-low yields and increased pressure on loan structures. That pressure is evident in the continued popularity of “covenant-lite” loans, which offer investors less protection than do traditionally structured loans. Cov-lite issuance hit yet another record in July, according to LCD. You can read more about how covenant-lite loans work here.
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.