LPC-Investors wary of macro environment push back on riskier leveraged loans
By Lisa Lee
NEW YORK Oct 4 (Reuters) - Syndicated loan investors wary about the uncertain macro-economic environment are keeping a disciplined approach when buying loans, pushing back on pricing for the riskier leveraged credits, even as the need to put money to work eclipses the number of loans available.
General uncertainty about how soon or how much the Federal Reserve will raise rates, concerns about future corporate earnings and the US economy, as well as overall incertitude about the looming US elections, are making investors more careful before allocating cash into the riskier part of the leveraged loan market, which is considered speculative and rated BB/Ba or lower.
A Goldilocks backdrop for leveraged loans has led to a raft of issuer-friendly deals, such as repricing of spreads, adding leverage and debt-fueled dividend payments to owners. Nonetheless, when marginal credits come to market, loan investors are being disciplined and pushing for better pricings and terms.
"The strong demand is still focused on relatively better credits," said Steven Oh, global head of credit and fixed income at PineBridge.
DEMAND IN LOAN LAND
Economic policy decisions from global central banks and a more than three-year long regulatory overhaul on risky lending are the main causes of the burgeoning demand for loans, the tight supply, and the sense of caution in the leveraged loan space, said sources.
Low interest rates around the globe have pushed investors to seek the higher yields of risky corporate debt, while the Federal Reserve's impending rate hikes and the Securities and Exchange Commissions' money market reform have pushed Libor up, increasing the demand for floating rate loans which pay a spread over the benchmark. Meanwhile, regulators have clamped down on how much debt banks can place on below-investment grade companies, muting the supply of leveraged loans.
Interest rate hikes can mean ensuing volatility in risk markets, and this foresight has infused loan investors with apprehension over poorer credits. While loans are floating rate, they can trade down in correlation to fixed income products and are especially prone to selling by investors who hold both leveraged loans and high-yield bonds. Continued...