Old Habits Refuse to Die in $1 Trillion Leveraged Loan Market

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(Bloomberg) -- The U.S. leveraged loan market is now bigger than $1 trillion, but it’s not quite yet in the big leagues. Look under the hood and you will see a market that’s still clinging to some really old habits.

Firstly, loans are contracts, not securities, so it’s risky to draw too many parallels with high-yield bonds. And loans are mostly private and unregulated -- which enables some issuers to limit which lenders get access to financials, while others can blacklist problematic investors.

Then there’s the secondary market. It takes about 17 days on average to settle a loan trade, according to IHS Markit, compared to three for a bond.

Managers of collateralized loan obligations may not care about the settlement delay, since most of their capital is locked up. But there are real consequences for loan mutual funds and ETFs, which hold about 30 percent of outstanding leveraged loans. The latter pledge immediate liquidity to investors, but the underlying loans simply don’t deliver.

"That sorta fools people," is how Scott Minerd of Guggenheim Partners, described the problem earlier this week in an interview at the Milken Global Conference in Beverly Hills.

Credit investors hoping to ride the rates cycle higher with loans need to keep both eyes open. While the junk bond and leveraged loan markets may now have similar dimensions, they are fundamentally different.

©2018 Bloomberg L.P.

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