Leveraged-Loan Boom Rejected by David as Goliath Buyers Jump In
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Sept. 11 (Bloomberg) — The biggest and smallest buyers can’t seem to agree on whether to plow cash into high-yield loans or to pull it out.
While mutual-fund investors have yanked $2.6 billion from the debt this year, institutions are still piling in. Bank of America Corp. and JPMorgan Chase & Co. boosted this month their forecasts for collateralized loan obligation issuance in 2014 to what would be new records. CLOs pool loans into new securities with varying risk and return that are sold to institutions and hedge funds.
Baloise Holding AG, Switzerland’s third-largest insurer, is one of the latest to embrace the asset class to boost returns. Investors across the globe are taking on more risk in a hunt for yield amid a sixth year of near-zero interest rates from the Federal Reserve.
The firm has “started investing in U.S. senior-secured loans,” said Martin Strobel, the company’s chief executive, in an interview on Sept. 8 in Basel, Switzerland. He acknowledged there’s competition to buy the debt, saying, “We aren’t the only ones interested.”
Buyers from pensions to life insurers poured $14.6 billion into U.S. bank loans in the first six months of the year, bringing their holdings of the debt to $209.4 billion as of June, according to data provider eVestment. Institutions own more than twice the $90.3 billion they held in March 2009.
Overwhelming Attraction
This growing demand from institutions explains why Wall Street is planning more than $85 billion in leveraged-loan offerings, including to fund acquisitions such as Burger King Worldwide Inc.’s purchase of Tim Hortons Inc., according to data compiled by Bloomberg.
One reason the debt has become so popular is because its coupon payments float above benchmark rates, a selling point as the U.S. central bank prepares to raise borrowing costs next year.
Mutual-fund investors, however, seem a bit more concerned about credit risk than interest-rate exposure. They’ve plowed $72.2 billion into investment-grade bonds — which are more sensitive to moves in benchmark borrowing costs — while pulling $14.7 billion from high-yield bonds and $2.6 billion from leveraged loans, according to Wells Fargo & Co. data.
The buying by institutions is overwhelming the waning demand from individuals, though, and helps explain why average loan prices are about the same as they were at year-end, at 98 cents on the dollar, despite the outflows from mutual funds. Loans have returned 2.2 percent this year, according to the Standard & Poor’s/LSTA Performing Loan Index.
Smaller investors may have a reason to be cautious, but there’s a lot of money chasing the debt for now.
–With assistance from Christine Idzelis in New York and Carolyn Bandel and Jan Schwalbe in Zurich.
To contact the reporter on this story: Lisa Abramowicz in New York at labramowicz@bloomberg.net To contact the editors responsible for this story: Shannon D. Harrington at sharrington6@bloomberg.net Caroline Salas Gage, Chapin Wright
