Leveraged Loan Rally Extends as Cash Pours Back in
(Bloomberg) -- U.S. leveraged loans traded higher in the secondary market on Monday as money flowed back into exchange-traded funds. The market is underpinned by the rates outlook and firm economic fundamentals, though it remains susceptible to another big drop in equities.
Building on Friday’s rally -- the best one-day loan return in 10 years -- investors continued to buy the more liquid loans in the secondary. Dell’s $5 billion term loan rose by about 0.5 cents to 98.5 cents on the dollar Monday, after gaining 2 cents on Friday, according to loan traders who are not authorized to speak publicly.
Envision’s $5.45 billion term loan rose to 97.25 bid, up 0.75 after Friday’s 2.5-point rally, said the traders, who asked not to be identified. Burger King’s $6.3 billion term loan, another big gainer on Friday, increased to 98.5 cents on Monday.
"Valuations just got too cheap, unless you expect a recession and a spike in default activity," said Michael Marzouk, a portfolio manager at Pacific Asset Management, in an email on Jan. 4.
The benchmark S&P/LSTA Leveraged Loan Price Index jumped to 94.92 on Friday, up from 93.81 -- the lowest since July 2016 -- on Dec. 28. The leap boosted loan returns to 0.94 percent on Friday, the best one-session performance since Jan. 7, 2009.
Loans also benefited from the first significant influx of cash to ETFs in weeks. SPDR Blackstone/GSO Senior Loan ETF, the largest actively managed loan ETF with ticker SRLN, posted the second largest inflow in its history on Friday.
Invesco Senior Loan ETF, the biggest passively managed loan ETF -- which reports with a one-day lag under the ticker BKLN -- is expected to have had a big Friday as well, according to Eric Balchunas, ETF analyst at Bloomberg Intelligence.
"I would not be surprised if we see record daily inflows or something close to for BKLN on Friday," Balchunas said today. He noted that since high-yield bond and loan ETFs were so beaten up, "they pop a little faster and higher."
ETFs are a small fraction of the buyer base for leveraged loans. But the inflows had a significant positive impact on sentiment, raising hopes of an end to a big run of outflows, according to loan market participants.
The secondary surge lured borrowers back in. At least five issuers scheduled bank meetings to syndicate new deals, including a $740 million term loan to back a buyout of software provider Cast & Crew, after the slowest December since 2011.
Boosting the tone after a rough December for leveraged loans was a strong jobs report and a more dovish tone from Federal Reserve Chairman Jerome Powell. Both strengthened appetite for high-yield bonds and loans, reassuring investors who had been concerned about rising credit risk if the U.S. tipped into recession and also saw less value in floating-rate assets as a hedge against rising rates.
To be sure, risk assets remain vulnerable to sudden swings in equity and commodity markets, but dedicated investors sound upbeat about the opportunity.
"There have been some very challenging technicals in the market and investors are recognizing that there are some cases in which levels are disconnected from economic fundamentals," said Jonathan Insull, portfolio manager at Crescent Capital, in an email today. "We saw a great jobs print on Friday morning. That along with other indicators point towards no recession. No recession? Then, low defaults. Low defaults? Good returns in credit."
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