Junk-loan borrowings in the U.S. have exceeded the record set before the financial crisis amid unprecedented demand for the floating-rate debt.
Non-bank lenders such as collateralized loan obligations, mutual funds and hedge funds bought $581.6 billion of the loans this year, surpassing the 2007 peak of $581.5 billion, according to data compiled by Bloomberg.
The Federal Reserve’s policy to keep interest rates near zero for a fifth year is spurring investors to buy riskier assets in order to boost returns. About 79 percent of so-called institutional loans have been used to extend maturities and reduce interest costs, Bloomberg data show.
“The loan market’s been a very popular asset class this year,” Michael Anderson, a strategist at Citigroup Inc. in New York, said in a telephone interview. “Supply totals can quickly accumulate given the demand for loans and the ability for issuers to refinance at any time.”
Chicago-based publisher Tribune Co. got a $3.8 billion term loan this week to support its acquisition of television stations and to refinance debt, while Hilton Worldwide Finance LLC, the biggest hotel chain in the world, obtained a $7.6 billion term piece last month to support a refinancing, Bloomberg data show.
Clear Channel Communications Inc., the radio and outdoor advertising company bought by Bain Capital Partners LLC and Thomas H. Lee Partners LP in a 2008 leveraged buyout, received a $5 billion credit in May to refinance some of its $21 billion of debt.
Loan prices rose to 98.21 cents on the dollar today, from 96.35 cents on Jan. 2, according to the Standard & Poor’s/LSTA U.S. Leveraged Loan 100 index. The measure reached 98.88 cents on May 8, the highest since July 2007.
There have been $895 billion of leveraged loans, including debt sold to banks and revolving credit lines, made in the U.S. this year, compared with $899 billion in 2007, Bloomberg data show.
Leveraged loans are those rated below BBB- by S&P and less than Baa3 at Moody’s Investors Service.
“If times remain good and appetite strong, you may see other sorts of deals, whether it be loans to take out bonds or some M&A or LBOs,” Anderson said. “Supply tends to find demand.”
The Fed has said it will hold its target interest rate for the federal funds rate at 0 to 0.25 percent at least as long as unemployment remains above 6.5 percent and the outlook for inflation is no more than 2.5 percent. Four of five investors expect a cut to the Fed’s bond buying program will be delayed until March or later, according to a Nov. 19 Bloomberg Global Poll.
“The possibility of the Fed moving sooner than markets expect represents a key risk to the short-term outlook” for fixed income, Jeffrey Rosenberg, chief investment strategist at BlackRock Inc., wrote in a report this month. There’s greater downside to risky segments of fixed income, including high-yield bonds and bank loans, Rosenberg wrote.