Loan Market Growth to Spur More Volatility, LSTA Panelists Say
Record inflows in funds that invest in leveraged loans will spur the growth of the market and result in more volatility, according to panelists at the 18th annual conference by the Loan Syndications and Trading Association in New York.
“You are going to see an evolution of the investor base,” Dan Smith, a senior managing director at Blackstone Group LP, said at the conference. “Many investors are embracing the asset class for the first time. It portends a little more movement and volatility.”
The Federal Reserve’s policy of keeping interest rates at about zero to bolster growth is pushing investors into riskier assets such as leveraged loans. Deposits this year into funds that buy debt that rises with benchmarks has exceeded $55 billion, marking a 74 percent increase in the assets under management, according to an Oct. 10 report from Bank of America Corp.
With the broadened out investor base, a 2008-like scenario “where the bottom falls out, is off the table now,” Smith said.
More than half the attendees polled at the conference expect the loan market to grow and become more volatile over the next five years.
“Banks have a tremendous appetite right now,” said A.J. Murphy, co-head of global leveraged finance at Bank of America, the largest underwriter of leveraged loans. “You are going to have a lot of enthusiasm on the part of the underwriters given that conditions are good.”
More than $827 billion of the speculative-grade loans have been issued in the U.S. this year, exceeding the $641.9 billion of the debt raised in 2012 and within 8 percent of the record $899 billion reached in 2007, according to data compiled by Bloomberg.
“It doesn’t feel at all like 2007,” Murphy said. “The market is more disciplined than people might have expected given how favorable the lending environment is. The kind of deals that are getting done are aggressive but not out of control.”
Speculative-grade U.S. companies have obtained a record $213.6 billion in covenant-light loans this year, more than doubling the previous peak of $96.7 billion reached in all of 2007, according to Standard & Poor’s Capital IQ Leveraged Commentary and Data.
“Cov-light is part of this credit cycle and it’s a reality that investors need to gravitate to,” said Scott Baskind, the co-chief investment officer for the senior secured bank loan team in New York at Invesco Ltd. (IVZ), which oversees $22 billion of the debt.
“It’s a great indication of the acceptance of investors and managers alike of the types of deals that are getting done,” Baskind said.
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