Investments

Leveraged Lending Sees a Renaissance

Leveraged loans

In investing, returns are everything, and when it comes to fixed income, yield is everything.

The Wall Street Journal reports that investors are “desperate for decent income” and that riskier companies, which typically offer higher yields in return for higher risk, are “taking full advantage.”  The leveraged loan world, said the WSJ, has been a bit off-kilter.

Money has been pouring into the leverage loan sector, as companies see inflows at a rate that has been running ahead of the last few years.  This means that retail investors have been putting cash to work in U.S. funds that make the loans themselves.  The net result has been that there have been inflows of $25 billion through the last year, which comes after two years of outflows, according to data compiled by Lipper, and now total holdings in such loan funds based domestically stand at $95 billion, which the Journal notes is below the past peak of $112 billion in 2014.  Funds are armed with capital, with $200 billion in cash that remains ready to be put to work.

This means that companies can float leverage loan issues that may be a bit outsized. Consider Dell, which last year went to market and raised $20 billion in a leverage loan deal that in turn funded the tech behemoth’s takeout of EMC.

Investors will snap them up given the fact that the debt is secured, and the lending structures are usually set to provide insulation for investors (and the corporate borrowers) against interest rate changes. The landscape for such debt is also attractive for both borrowers and lenders as borrowing costs are low, and even though yields are low too, in the U.S. they are relatively high, at five percent, compared to European yields of below four percent.  In addition, covenants, which are stipulations that companies must have, among other things, certain leverage and financial ratios in place, have been “lighter” than they have been in the past.  The result is that lenders have less influence over a borrowers’ financial strategy and direction.    The Journal noted that 60 percent of European debt deals and 75 percent of U.S. debt deals were “lite.”

 

 

 

 

 

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