By Yun Li
NEW YORK (LPC) - Leveraged loans are standing out as the best-performing asset class in an otherwise brutal October as rising volatility in global equities has rippled across the capital markets.
While investors pulled US$7.4m from loan funds in the week ending October 24, the first week of outflows in four months, the asset class has been largely unfazed by the risk-off sentiment created by the deepening stock market rout.
US equities renewed their sell-off on Friday on disappointing reports from Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOGL). The S&P 500 Index and the Dow have wiped out their gains in 2018, while the Nasdaq entered the correction territory, Reuters reported.
Average bids for US loans, meanwhile, held steady at 98.87 on October 25, only slightly down from 98.91 on October 1, according to LPC data. Around 43% of US loans are now trading above par, or above face value, compared to only 23% in July, as demand for floating rate assets remains high in a rising interest rate environment.
“Investors are shifting their portfolio allocations away from public equities and are [going] back into floating-rate loans,” said Kimberly Flynn, managing director at XA Investments. “With concerns about rising interest rates, investors who are making [adjustments] in their equity portfolios are not moving back into investment grade or high yield fixed income. Loans are benefiting from this.”
Equity volatility has spilled into the credit markets. The interest rate-sensitive high yield bond market has traded lower by about 1% in October, according to the Bank of America Merrill Lynch (NYSE:BAC) US High Yield Index.
Despite October’s bout of risk aversion, the loan market is significantly outperforming equities and bonds with gains of +0.18% in October beating the S&P 500 (-8.8%), high yield bonds (-1.22%), and investment grade bonds (-0.87%), JP Morgan analyst Peter Acciavatti said in an October 25 note.
FLOATING-RATE DEMAND
Loan funds have seen US$16.8bn of inflows in the year to date, while high-yield bond funds have seen outflows of US$28.7bn as rising interest rates eat into returns. Loans, whose prices go up as interest rates rise, have seen inflows in 37 of the last 39 weeks.
Such is the demand for floating rate debt that several loan repricing deals started trading in the US secondary market this week and were quoted as high as 101.
Staffing services company EmployBridge's US$485m repriced term loan B opened at 100.75-101.25 on Wednesday after going free to trade. The company priced the deal at 450bp over Libor with a 1% Libor floor at par, which cut 50bp from the spread on its existing loan.
Specialized hospital and outpatient care provider Select Medical's repriced US$1.133bn term loan was quoted at 100.375-100.75 when it broke for trading on October 22. The deal will save the company 25bp by pricing at 250bp over Libor with a 0% floor, compared to 275bp over Libor previously.