Leveraged-Loan Trades in U.S. Rise to Most Since ’07, LSTA SaysKristen Haunss
Speculative-grade company loan trading rose to more than $517 billion last year, the most since $520 billion of the debt exchanged hands in 2007, according to the Loan Syndications and Trading Association.
Trading last year surged 31 percent from $396 billion in 2012, according to a study published by the New York-based group. Volumes peaked during the second quarter with about $150 billion, an increase from $123.8 billion during the first three months of the year.
The increase in trading mirrored a record year in issuance of new loans, driven by more than $143 billion of demand from collateralized loan obligations and mutual funds. Leveraged loans are used to back leveraged buyouts and help companies refinance existing debt.
“We started the year off with an incredibly robust CLO market and as mid-year approached, loan retail funds started getting massive inflows due to outflows from high-yield funds because of the threat of rising rates,” Barry Zamore, head of U.S. par loan trading in New York at Credit Suisse Group AG, which had its biggest loan trading volume ever in 2013, said in a telephone interview. “Retail funds had to put this money to work and the secondary loan market was the quickest way to do that.”
More than 1,700 trades on individual loans closed on average each quarter last year, according to the LSTA. The majority of trades were of par, or performing, loans. Of the approximately $122 billion of volume in the fourth quarter, $117.6 billion were par transactions, according to the report.
“There was a huge growth in the size of the market, therefore there was more trading,” Ted Basta, senior vice president of market data analysis at the LSTA, said in an e-mailed statement.
There were $351 billion of new loans issued in 2013, the most active year ever, and an increase of 33 percent from the year earlier, according to data compiled by Bloomberg. Leveraged loans are rated below BBB- by Standard & Poor’s and less than Baa3 at Moody’s Investors Service.
Loans returned 5 percent in 2013 and have returned 0.64 percent this year, as of Jan. 30, according to the S&P/LSTA U.S. Leveraged Loan 100 Total Returns Index.
There were $82 billion of CLOs issued in the U.S. last year, a 49 percent increase from 2012, according to Royal Bank of Scotland Group Plc. The market peaked at $92.8 billion in 2007.
CLOs, a type of collateralized debt obligation that pool high-yield, high-risk loans and slice them into securities of varying risk and returns, were the largest buyers of leveraged loans last year, with a 53 percent market share, according to the LSTA report, citing data from S&P Capital IQ LCD. Retail loan funds were the second largest buyer with 32 percent.
There was $61.3 billion of inflows into U.S. bank-loan mutual funds in 2013, compared with $11.2 billion in 2012, according to data from Morningstar Inc.
On Jan. 29 the Federal Reserve left unchanged its statement that it will probably hold its target interest rate near zero “well past the time” that unemployment falls below 6.5 percent, “especially if projected inflation” remains below the committee’s longer-run goal of 2 percent.
The expectation that interest rates will rise may lead more investors to buy floating-rate products in 2014, which may lead to another active year of trading, Basta said.