BlackRock Says Insurers May Be ‘Next Phase’ of Loan Capital
BlackRock Inc. (BLK), the world’s largest asset manager, said insurers may buy leveraged loans as they seek to boost portfolio returns, replacing investors that retreated from the market.
The firm, which manages over $200 billion in general- account assets for more than 150 insurance companies, is pitching loans as clients seek to diversify. Aflac Inc. (AFL), the largest provider of supplemental health coverage, separately initiated a program in May for investing in the debt to U.S. and Canadian corporations, aiming to increase yields and protect against rising rates. Reinsurer Everest Re Group Ltd. (RE) has also added loans to its portfolio.
“Insurance companies will be the next phase of capital into the market,” BlackRock’s Leland Hart, who oversees more than $10 billion in loans, said in a phone interview.
Insurers have been shifting assets as the Federal Reserve keeps benchmark interest rates in a target range of zero to 0.25 percent. BlackRock, based in New York, is seeking capital for a market that shrank by about 13 percent since the 2008 collapse of Lehman Brothers Holdings Inc. caused investors to shun riskier assets such as high-yield, high-risk loans.
Aflac had invested $72 million in secured loans as of June 30 and may spend more as it contracts with asset managers to oversee as much as 10 percent of its $93 billion portfolio. Leveraged loans to corporations are rated below Baa3 by Moody’s Investors Service and lower than BBB- by Standard & Poor’s.
“When we look at the fundamentals of the underlying companies, they’re actually pretty solid,” Eric Kirsch, who was named Aflac’s global chief investment officer last week, said in a phone interview after his hire was announced. Loans are one of the asset classes that the company may invest in to diversify its balance sheet, he said.
Everest Re has added high-yield, floating-rate loans to its portfolio as investment-grade fixed-income investments mature, Jack Nelson, chief investment officer, said yesterday at the Reactions Magazine North America Conference in New York. The shift is part of a strategy to boost the Bermuda-based company’s investment returns, he said.
Syndicated loans are one way that insurers are seeking to improve yield in their investment portfolios, said Matt Malloy, head of insurance for North America at JPMorgan Asset Management, during a panel discussion at the Reactions conference.
Focused on Yield
Insurers are “focusing on yield in other areas outside of traditional fixed income,” said Malloy. That includes investments in emerging-market debt, high-dividend stocks and private-market credit such as mezzanine finance and senior direct lending, he said.
Insurers historically have been more active investors in the high-yield bond market than the loan market, in part because the securities often lack call protection, said Chris Taggert, a senior analyst at research firm CreditSights Inc. That makes income from debt instruments harder to match to an insurer’s return requirements, he said. The call feature aids investors by penalizing issuers if they redeem debt before it matures.
Most loans are floating-rate instruments based off the London interbank offered rate, or Libor. Three-month Libor for dollar loans rose to 0.36856 percent from 0.36522 percent yesterday, according to data from the British Bankers’ Association.
“Some of the challenges that didn’t make loans all that appealing in the past still remain,” said Taggert, in a phone interview. “If you’re an investor who is seeking to earn a current income, low Libor is a factor.”
The average minimum Libor that companies offered was 1.375 percent for the month ended Sept. 15, according to Standard & Poor’s Leveraged Commentary & Data.
Owning fixed-income securities that don’t use U.S. benchmark rates may be a benefit, said BlackRock’s Hart. The Fed has pledged to keep its benchmark rate low through mid-2013 if unemployment stays high and the inflation outlook is “subdued.”
“Every insurer is looking at yield, and they’re also saying to themselves, ‘Should we be tied to the mast of U.S. government rates as our benchmark, given where rates are and predicted to be through 2013,’” said Hart.
Pricing for loans rated B+ or B rose to 577 basis points in the month ended Sept. 15, according to S&P’s LCD. The average all-in spread -- which includes upfront fees amortized over an assumed three-year life and Libor floors -- was at a record low of 214 basis points in February 2007 as the buyout boom was peaking. A basis point is 0.01 percentage point.
Terms for some loans may be changing. Lenders are asking for call protection on loans, which may make them more attractive to insurers, said Richard Farley, a New York-based attorney with Paul Hastings LLP, which advises banks that syndicate loans.
“Insurance money has become a lot more relevant in terms of what you need to get a deal done because the retail money isn’t there,” he said.
Insurers purchased 6.7 percent of loans sold to institutional investors in the second quarter, up from 1.9 percent in 2008, according to S&P LCD. Those figures may understate the companies’ investments in the asset class because they don’t include funds managed for insurers by outside firms.
The notional volume of the Standard & Poor’s/LSTA Loan index was $519 billion in August, down 12.6 percent from 2008 when it was $594 billion, according to a report by New York- based CreditSights.
Collateralized loan obligations, which pool leveraged loans and slice them into securities of varying risk and return, once dominated the primary institutional loan market. Their share has contracted along with the decline in volume. CLOs comprised 41.5 percent of the market in the second quarter this year, down from 52.2 percent in 2008 and 66.7 percent in 2002, according to S&P LCD.
The total return on the S&P/LSTA U.S. Leveraged Loan 100 Index, which tracks the 100 largest dollar-denominated first- lien leveraged loans, was down 2.4 percent this year through yesterday. It declined 4.9 percent in August, the biggest monthly slide since November 2008. U.S. high-yield bonds have lost 0.14 percent this year, according to Bank of America Merrill Lynch index data. The debt lost 4 percent in August.
The insurance industry’s investment in loans won’t happen immediately, said BlackRock’s Hart.
Insurers are “a very deliberate investor class,” he said. “This is pragmatic, step-by-step thoughtfulness. It won’t be a flood, but rather a consistent stream.”