Nov. 18 (Bloomberg) -- Issuance of loans that offer lenders a lesser claim on a borrower’s assets is poised to be the most in six years as fixed-income investors accept greater risks, according to a report by Fitch Ratings.
Second-lien loan sales have reached $28.8 billion this year, the most since $40.5 billion of the debt was originated in 2007, according to a report from the ratings firm. About 46 percent of these loans are covenant-light, meaning they lack lender protections like financial maintenance requirements.
Second-lien issuance is soaring as investors repressed by the Federal Reserve’s zero interest rate policy are lulled by below-average default rates and seek to boost returns. Loans have gained 4.46 percent this year, compared with a 6.15 percent return for high-yield bonds, according to the Standard & Poor’s/LSTA Leveraged Loan Total Returns Index and Bloomberg index data.
There have been about $60 billion of inflows into funds that buy floating-rate debt this year through October, according to Bank of America Corp.
The U.S. high-yield trailing 12-month default rate was 1.7 percent as of Sept. 30, according to Fitch. The measure peaked at 17.6 percent in November 2002.
Second-lien loan buyers include collateralized loan obligations, hedge funds, prime funds, high-yield and other non-bank institutional investors, as well as distressed investors at the lowest rating tier of issuance, according to Fitch.
To contact the reporter on this story: Krista Giovacco in New York at firstname.lastname@example.org
To contact the editor responsible for this story: Faris Khan at email@example.com