Loan market recap: Loans see record inflows after Bernanke’s talk (Part 2)

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Loan issuance recovered last, pulled up by the rally in high yield bonds

The fixed-income markets have recently experienced extreme volatility every time Bernanke took the stand. The uncertainty of timing but certainty of occurrence has the fixed-income market on edge.

US Leveraged Loan Market Volumes 2013-07-23Enlarge Graph

While leveraged loans should benefit from the increased expectations of rising interest rates, analysts have linked the behavior of leveraged loans to the behavior of the bond markets (BOND) in general.

Both Treasuries, corporates, and high yield bonds have rallied every time tapering seems to move farther away, and they’ve dropped when tapering seems nearer. Each time this happens, both leveraged loan issuance and price levels have sided with bonds. Here’s a brief explanation of why this may be the case.

Volumes up

Odd market behavior aside, the leveraged loan market had a strong issuance last week—though probably driven by investor euphoria in the high yield market[LINK TO HY ISSUANCE]. A total of $7.1 billion priced across 11 deals, in a week characterized by issuer-friendly revisions. Nine companies out of the eleven printing deals were able to revise terms amid strong demand and oversubscription.

Strong rebound

The rebound in the market brought in several issuers that had been standing on the sidelines, waiting for better times to come to market. One of these issuers is Gardner Denver, which has cut its pricing down almost 100 basis points on its seven-year $1.9 billion cov-lite (loose financial restrictions) term loan. The loan was initially talked at L+400-425 with a 1% floor and 99 OID (original issue discount—new issuer discount 99 OID means initial investors get a 1% discount on the face value of the loan, approximately equivalent to +25 basis points on the interest rate if we assume a four-year refinancing horizon). By Monday morning, the loan talk was at L+325 basis points, with the same floor and lower OID at 99.5.

August looms around the corner

It’s important to bear in mind that volumes generally drop in August, when most deal makers take their vacations. For this reason, the recent rebound is likely to be short-lived. While it may resume the rally in September, August will likely show weakness and allow investors waiting on the sidelines to jump in.