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Dose of rates realism in the wake of the FOMC

Part 4
Dose of rates realism in the wake of the FOMC (Part 4 of 5)

Why last week was again positive for the leveraged loan market

A bullish week

Last week was yet another bullish week for the leveraged loan market. A total of 12 deals priced almost $13 billion worth of leveraged loans (BKLN).

US Leveraged Loan Market Volumes 2013-09-24Enlarge Graph

Extremely robust pipeline

The forward pipeline stood at just over $50 billion at the close of last week. This level is the second highest since last May and highlights the large amount of issuers that are trying to go to market to take advantage of the strong market fundamentals. Of the current $50 billion, 40% accounts for opportunistic refinancing, which continues to drive a large part of the new issuance volume.

Bullish issuance

Dell’s LBO (leverage buyout) loans as well as the refinancing for Hilton Hotels were launched last week and priced tightly earlier this week. Aside from the large headline deals, the market was receptive to smaller deals and less traditional deals. Last week, Shelf Drilling launched a PIK1 term loan, which signals an extremely bullish market.

Plus, seven of the twelve deals pricing last week included cov-lite tranches, meaning they were loans with less restrictive terms, such as those found in high yield bonds (JNK).

Secondary market strong, but BKLN not tracking

Last week, the LCDX20 Index closed up 0.6% for the week, closing at 104.19 versus 103.60 the week prior. Year-to-date returns for all leveraged loans total 3.78%.

The main leveraged loan ETF (BKLN) was, however, up only 0.3%. The problem with the leveraged loan ETFs is two-fold. One concern is that they’re not very liquid, so fully materializing profits may be a challenge. The second concern is that the tracking error of the ETF versus the key loan indices is large, which is largely driven by the lower liquidity of the underlying loans. That also leads to increased complexity when mimicking the loan index but keeping transaction costs down.

  1. Pay-in-kind: Bonds that give the issuer the option to pay interest in cash or accrue it to the principal value of the bond

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