miércoles, 22 de noviembre de 2017

miércoles, noviembre 22, 2017

A Risky Corner of the Market With Room to Run

Money has flooded of late into so-called leveraged loans, which are arranged by banks often to help private-equity firms leverage up companies they buy

By Paul J. Davies

A bubble occurs and ultimately pops when fundamental demand is misjudged and too many assets of ever poorer quality are mistakenly—or cynically—supplied to the market. Photo: MARY ALTAFFER/Associated Press 


The market for packaging risky loans is running hot-as-hell. It may not be a bubble yet, but troubling characteristics make it an area to watch.

Money has flooded of late into so-called leveraged loans, which have the credit quality of junk bonds and are arranged by banks often to help private-equity firms leverage up companies they buy. The banks then sell the loans on to investors.

U.S. retail investors in particular have piled into loan-focused mutual funds and ETFs. There have been outflows in recent weeks, but these funds still hold $97 billion of investors’ money compared with less than $18 billion a decade ago, according to Lipper.


RISK REVERSAL
Weekly flows into and out of U.S mutual and exchange-traded funds investing in loans



Insurers and pension funds have also invested heavily, both with specialist managers and through buying structured funds known as collateralized loan obligations. U.S. and European CLO volumes could hit totals in 2017 that rank as their second or third biggest year ever.


STRUCTURAL DEMAND
Issuance of special investment funds known as collateralized loan obligations (CLO)



With such huge demand, yields on such loans have been crushed: in Europe they are at record lows and still falling, according to S&P Global LCD, in the U.S. they are just very low. Demand from investors has outstripped supply as private-equity firms have found it hard to close really big buyouts. And this is the source of worrying signs.


DRIFTING APART
Yields on U.S. and European loans sold in capital markets



Funds struggling to put investors’ money to work have been accepting cheaper and looser terms. Borrowers now have the whip hand. This has allowed them to slash interest rates on their debt by refinancing quickly. They have also managed to kill the traditional covenants, which protect lenders from businesses developing problems in repaying their debt.

Fewer covenants mean fewer defaults as borrowers have no conditions to breach. But this could also mean that when defaults do come, borrowers will be in a much worse state and lenders get less back.

These loans and the CLOs that invest in them are typically less easily tradable than securities such as corporate bonds. It is this illiquidity that gives them the extra sliver of yield that investors desire. As such, loans and CLOs fit into the broader pattern of investors’ drift into illiquid and private assets in the hunt for better returns.

If this sounds worrying, there could be a leg up to keep the loan market going. Supply has been held back partly because U.S. regulators have restricted how much debt can be used in buyout deals. The White House is pushing to change this, which could give the entire market another boost, improving supply, but also make loans riskier.

A bubble occurs and ultimately pops when fundamental demand is misjudged and too many assets of ever poorer quality are mistakenly—or cynically—supplied to the market. The loan market is fertile ground for such conditions to take root, but there may be a way to go before things get really dangerous.

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