Leveraged loan market shrugs aside global pick up in volatility
Much of this has to do with the way loans work. As secured floating rate instruments, they are largely uncorrelated with other mainstream financial assets, providing some insulation from instability in the equity and high yield bond markets.
That said, demand continues to be incredibly strong for the asset class at present, with a clear imbalance between supply and demand (Standard & Poor’s suggest there could be aggregated latent appetite of the order of €40bn stemming from European and US CLOs, other fund investors, prime funds and repayments). This imbalance is only likely to be exacerbated by jitters in other markets, with investors seeking what they might perceive to be a ‘safe haven’ in a period of uncertainty. These factors serve to reinforce some more negative features creeping into the market – including increasingly aggressive (leveraged) transactions, and most notably downward pressure on spreads that sponsors and arranging banks are prepared to pay.
It also shouldn’t be forgotten that we are talking about the debt of sub-investment grade companies; true, leveraged loans have had a recovery rate of 80% in the event of default, which is much higher than the 40% recovery rate seen in the high yield market, but senior loans are still rated B/BB and credit default risk is therefore very real. We are therefore continuing to be very selective in choosing which new loans coming to the market we should invest in. Quality is key, more so now than ever.
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.