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July 26, 2013 6:26 pm
Global investors are committing money to the leveraged loan market in record volumes, even after 58 straight weeks of inflows, chasing an asset class seen offering both a high yield and protection from big market swings.
More than $40bn has now flowed into loan funds this year, according to EPFR Global, including a record $2.18bn in the week ended this Wednesday.
Loan funds buy floating rate bank loans to big companies, especially high-leveraged companies owned by private equity groups.
While equity investors occasionally took fright at signs the global economy may be flagging, and bond investors took flight when stronger economic data suggested the Federal Reserve will wind down monetary easing, leveraged loans have marched onward in all weathers.
Fifty-eight weeks is the longest uninterrupted streak of positive inflows since Lipper began collecting weekly data on the asset class in 2003.
Eric Gross, credit strategist at Barclays, said the attractions of loan funds include the fact that leverage loans get a higher priority than bonds if a company goes bankrupt. The floating rate also means that they will not sell off as sharply as fixed-income investments when interest rates rise.
With an effective yield that Barclays calculates at 5.8 per cent, loans offer close to the same yield as junk bonds, which currently yield 6.1 per cent on a Barclays average. “You get a similar yield and you have less downside risk,” said Mr Gross.
Loan funds remain a smaller asset class than fixed income and equity funds, where there were also strong inflows in the past week. Overall, EPFR Global-tracked bond funds took in a nine-week high of $4.36bn, while equity funds absorbed $8bn.
In particular, US high yield bond funds posted their second biggest weekly inflow on record, according to EPFR, rebounding from June’s Fed-related sell-off.
“The [leveraged loan fund] asset class is one of the few for whom rising interest rates are a plus,” EPFR analysts wrote this week. “But, given the appetite for exposure to junk bonds, fears of a sharp hike in the cost of capital – especially in the US – are receding.”
The all-weather appetite for leveraged loans has been a boon for companies that were taken private near the peak of the credit bubble six years ago, since it has provided money with which to refinance maturing or onerous debt.
In a report this week, Fitch, the credit rating agency, estimated that of the $970bn of loan issuance over the past four quarters, approximately 66 per cent has been directed towards loan refinancing. The report said that the biggest threat to the creditworthiness of highly-leveraged companies had been “all but eliminated” by the issuance.
The total amount of debt due until the end of 2015 had been reduced from a high of $1.2tn at the beginning of 2011 to $440bn at June 28, 2013, Fitch said.
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