Why were leveraged loan issuances for last week so feeble?



Unvoiced floating rate week

The leveraged loan (BKLN) issuance calendar for the week remained busy, with 18 deals announced last week. The volume totaled $19.7 billion in new issuance. The deals were slightly lower than the previous week, which brought mostly mergers and acquisitions (M&A).

Last week saw a wide array of deals. Repricing remained low, as investors focused on new money deals. Dividend recapitalization deals and M&A were also less than the previous week amid concern due to weaker-than-expected economic data. Investors remained skeptical about the spike in the long-term interest rate, as the Fed’s next taper is expected this month.

Leveraged Loan issuance by purpose

Last week, we saw some pull-back on institutional loans with the covenant-lite clause. Covenant-lite loans lack certain contractual and structural protections traditionally embedded in high-risk financial instruments. So in the event of any adverse developments, such as a default or financial restructuring, the investor may experience larger principal losses. Issuers favor covenant-lite loans due to their less stringent policies, but investors need to remain cautious and check on the issuer’s financial stability time and again to avoid surprises.

The S&P/LSTA U.S. Leveraged Loan 100 Index, which tracks loans in the B to BB rated category, declined 0.1%. However, the index was up 0.3% from December’s end. The decline in the index was driven by soft unemployment data and weaker manufacturing and ISM indicators. On a similar note, the main leveraged loan ETF (BKLN) bond prices were flat, down 0.04% over the last week and slightly better than December 2013’s end.

For the bond market’s outlook, read on to the next part of this series.

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