Leveraged Loans at Two-Year Low as Bonds Fall, Supply Weigh

(Bloomberg) -- The U.S. leveraged loan market’s benchmark price index dropped to a two-year low yesterday as credit and equity markets slumped. Besides negative vibes from the junk bond market, investors blame an increase in supply as issuers piled in to capitalize on robust demand for floating rate assets.

"We have these pockets where supply catches up to demand," said Chris Remington, portfolio manager at Eaton Vance, one of the biggest U.S. investors in leveraged loans. Jumbo LBO deals from Refinitiv, Akzo Nobel and Envision boosted fall issuance.

Leveraged Loans at Two-Year Low as Bonds Fall, Supply Weigh

Leveraged loans are seen as a defensive asset as the Fed hikes, given their floating returns. They’re also slower moving, so less susceptible to the wild price swings of bond and equity markets.

But loans don’t live in a bubble -- concerns about peak earnings, trade wars, oil prices and rising rates are all knocking credit, which had its worst October since 2008 and continued to sell off this month. In addition, higher rates boost balance sheet risk.

“We still have strong fundamentals and we don’t have the same oil exposure as high yield,” said Jonathan Sharkey, a portfolio manager at Amundi Pioneer. “Between now and the end of the year, there doesn’t appear to be much new loan issuance and so people may bid loans back up."

The benchmark index plunged this week to a two-year low, dragging returns to below 4 percent for the year.

“We welcome the volatility,” said Eric Mollenhauer, co-portfolio manager of leveraged loan funds at Fidelity Investments. “It’s really healthy. Nothing is more difficult than a market where everything trades above par.”

For most of 2018, it’s been a seller’s market. Volatility may be an opportunity for buyers, if they can take the upper hand.

"It’s better for the loan market," said Ralph Hinckley, another loan portfolio manager at Eaton Vance. "The secondary market is trading more actively than it was a month ago and in the primary market, it lets you push back a little more on deals."

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