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Why refinancing deals crowded the high yield bond market

Part 4
Why refinancing deals crowded the high yield bond market (Part 4 of 6)

Why the leveraged loan space remained buoyant last week

Weekly loan issuance

Weekly loan issuance provides an early indication of trends in the leveraged loan market. As expectations of higher interest rates continued, loan volume remained buoyant last week. This may be a trend in the leveraged loan (BKLN) market in the coming months. A number of issuers won tight pricing from investors, as reflected in the market flex activity.

Leveraged loanEnlarge Graph

Issuer-friendly flex language

Market flex has been one of the best ways to gauge price negotiations in the leveraged loan market. During the process of loan syndication, bankers normally open the door for adjustments in pricing and other terms of the deal.

Generally, there are two types of flex language. One is close-ended, which allows investors to negotiate on a finite list of terms set by the banker. However, the banker takes a final call on tweaking the term if they feel it’s necessary to successfully syndicate the loan. In the open-ended flex language, any of the terms of the loan documents may change—although bankers often agree to specific limits on changes to certain terms (such as a cap on increases in interest rates).

Tight pricing in market flex suggests higher investor demand for loans and contraction in credit spreads, as investors perceived less risk on holding the loan.

Average new-issue yields fell last week. Single-B rated loan yields fell to 4.89%, from 4.98% a week ago, while BB inched down to 3.53%, from 3.55%.

Total issuance edged up to $13.1 billion—$1.9 billion lower than the previous week’s $15.0 billion issuance. The year-to-date issuance was $6.5 billion.

In the next part of this series, we’ll discuss the structure of leveraged loan deals and changes in the major leveraged loan ETFs, including the PowerShares Exchange-Traded Fund Trust II (BKLN) and the Pyxis/iBoxx Senior Loan (SNLN). Both ETFs have top holdings in H.J. Heinz Company (HNZ), Dell International L.L.C. (DELL), and BMC Software (BMC).

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