U.S. Leveraged Loan Sales Set for Record Year, Could Beat Bonds

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Junk-rated borrowers are shifting their sights toward U.S. leveraged loans, sometimes at the expense of high-yield bonds, putting sales of the floating-rate debt on course for a record year of issuance.

United Airlines Holdings Inc., Michaels Cos. and Triton Water Holdings Inc. all recently opted to boost the size of loan offerings, while cutting bond deals, as they marketed the debt to both sets of investors. The deal outcomes signal the full recovery of the leveraged loan market that lagged high-yield bonds through most of the pandemic, and strong demand for the floating-rate debt that offers a hedge in a rising rate environment.

“Issuers enjoy the dynamic of having both loan and high yield bond investors focusing on and competing for new issuance,” said Scott Macklin, director of leveraged loan strategies at AllianceBernstein. “It’s the new norm to have secured bonds launched aside leveraged loans because issuers benefit from expanding investor distribution and constraining supply in each market. Right now, the two markets feel roughly equal in terms of pricing levels.”

Already new money leveraged loans -- those that back acquisitions, buyouts and dividends -- are coming at the fastest pace this year since at least 2013, as far back as Bloomberg data tracks, and vastly exceed refinancings. That’s in contrast to bond sales which have been dominated by refinancings of existing debt.

U.S. Leveraged Loan Sales Set for Record Year, Could Beat Bonds

Barclays Plc, which last week raised forecasts for sales in both markets, reckons that leveraged loan issuance (minus repricings which only cut the borrowing cost) will exceed junk bonds by some $20 billion this year. At a target of $430 billion to $450 billion of supply, 2021 would be an all-time high for U.S. leveraged loans. About $173 billion of loans have been sold this year already, just slightly below the $177 billion for U.S. high-yield bonds, according to data compiled by Bloomberg.

More refinancings are expected as a possible spike in interest rates entices companies to act sooner than later, said Bradley Rogoff, global head of credit research at Barclays. There should also be more loans to fund payouts since investors have been willing to accept higher leverage, while companies may have more incentive to borrow due to potential tax changes, Rogoff added. Barclays hiked its dividend-linked loan supply forecast to $65 billion to $70 billion from a previous estimate of $40 billion to $45 billion.

There’s room for leveraged loans to run even hotter. When the Federal Reserve last hiked rates in 2018, loan supply exceeded bonds by more than $200 billion, according to Barclays data.

©2021 Bloomberg L.P.

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