Overview: Corporate debt—have high yield investors had enough? (Part 5 of 8)
Leveraged loan issuance in the primary market for the week ending June 20 (Source: S&P Capital IQ/LCD)
Unlike the high-yield (HYG) debt market, issuance levels continued to hold steady in the leveraged loans primary market, due to the prospect of low rates in the near term . In the week ending June 20, a total of c. $12 billion issued in the leveraged loans primary market in 12 transactions, down slightly from the c. $13.4 billion issued the previous week. There was no change in the number of deals though.
CLO deals (Source: S&P Capital IQ/LCD)
Four Collateralized Loan Obligations (or CLO) deals for c. $2.4 billion came through, in the week ending June 20. This was up from two deals for total issuance amounting to c. $1.3 billion, in the week ending June 13. Last week brings the year-to-date (or YTD) issuance and transaction figures to c. $57 billion and 105 deals, respectively.
The market for CLOs has exploded in 2013 and 2014 with a record number of transactions and issuance volumes. Low yields on safer debt securities like investment-grade debt (BND) have forced investors to seek higher returns in high-yield debt (JNK) and leveraged loans. CLOs are stable right now because of their ability to slice credit risk into tranches. An investor with a low risk appetite may get exposure to AAA-rated debt tranche in a CLO, while an investor with a higher risk tolerance can earn higher yields by investing in lower rated tranches.
What are leveraged loans?
Leveraged loans are issued by companies rated below investment grade. A leveraged loan is a commercial loan provided by a group of lenders. Typically secured, the loan is structured, arranged, and administered by investment and commercial banks (the arrangers), such as PMorgan (JPM). It is then syndicated to other banks or institutional investors. The interest rate on leveraged loans is floating rate and paid as a spread over an interest rate benchmark, such as LIBOR. Interest rates on leveraged loans are usually paid at or above LIBOR + 1.25%.
JPMorgan (JPM) is part of the S&P 100 Index (OEF) which includes other investment and commercial banks like Citigroup and Wells Fargo.
In the next section, we’ll analyze the major transactions in the leveraged loans primary market including details of financing arrangements for the Custom Sensors and Technology LBO. We’ll also discuss secondary market trends. Please continue reading the next section in this series.