Why did demand for floating-rate paper increase last week?


Nov. 22 2019, Updated 5:59 a.m. ET

Resistance on aggressive deals

As expectations for higher interest rates continued, investors centered their focus on floating-rate loans to capitalize on interest rate volatility. While issuers definitely favored low borrowing costs and high demand, as depicted in the higher issuance of the chart below, many investors remained concerned over aggressive deal pricing. The past few weeks’ market flex activity reflected favoritism towards issuer-friendly activity. However, many sell-side analysts and institutional investors continued to resist the most aggressive transactions in market last week, at least for low-rated loans.

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 deal terms.

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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 makes the 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 perceive less risk for holding loans.

Average new-issue yields fell last week. Single-B rated loan yields fell to 4.81% from 4.89% a week ago, while BB inched down to 3.48% from 3.53%.

Total issuance edged up to $17.5 billion—$4.4 billion higher than the previous week’s $13.1 billion issuance.

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 Pyxis/iBoxx Senior Loan (SNLN). Both ETFs have top holdings in H.J. Heinz Company (HNZ), Dell International LLC (DELL), and BMC Software (BMC).


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