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— Industry Insight —
The loan market's brilliant January rally, which pushed the S&P/LSTA Leveraged Loan Index up a record 7.4%, was supported by improving technical conditions. Supply, for one thing, was minimal. High-profile bid-wanted-in-competition (BWIC) programs fell to $476 million in January, a four-month low, from $1.1 billion in December and from a fourth-quarter monthly average of $1.9 billion. The new-issue market, meanwhile, remains dormant. With little going on outside debtor-in-possession loans, institutional accounts funded just $1.6 billion of new paper in January, down from $3.5 billion in December and from a monthly average of $7.4 billion last year. This was, in fact, the second-lowest amount -- next to November's tally of $878 million -- in five years.
On the other side of the ledger, repayments popped to an 18-month high of $17 billion, from $3.4 billion in December and from an average of $4.1 billion last year, on the back of Verizon Communications Inc.'s purchase of Alltel. As a result, the pool of term loan outstanding contracted in January by $15.7 billion, or 2.64%. This is far and away the largest dollar decline on record, topping the prior mark of negative $4.7 billion from December 2007. It was also a new high by percent, inching past November 2003's contraction of 2.58%. Alongside the shrinking pool of loan assets, the market also got a boost from a modest increase in inflows during the month. AMG Data Services reported that loan mutual funds took in $177 million in January, the first month of net inflows since June and a vast improvement from the second half's average monthly withdrawal rate of $589 million. On the structured finance front, meanwhile, the market saw one off-the-run vehicle, a $262 million deal from Fraser Sullivan. It was the first print since September, bringing to a close the longest stretch of inactivity since at least 2001, when LCD began tracking these data. Looking ahead, accounts see technical conditions retaining a positive bias barring, of course, a new round of BWICs or vehicle unwinds. For one thing, retail fund flows are improving. Inflows into the funds climbed to $135 million on Feb. 5, the largest weekly intake since July 2007. Renewed enthusiasm for the loan funds comes on the back of a powerful rally in the trading price of exchange-traded loan funds, which by Feb. 10 had rallied 45% from their 52-week low, with increases ranging from 7% to 80%. Perhaps more important is that these funds now trade at an average premium of 0.95% to their net asset value. For obvious reasons, this is a good signal for continued inflows. Looking at nontraditional investors like pension funds, dealers say money is starting to trickle into the loan market from two main sources. One is crossover investing from high-yield accounts that are suddenly taking on strong inflows. AMG reported that investors have put $2.8 billion into high-yield mutual funds so far this year, the best start to any year since 2001. During the same period last year investors pulled $674 million from the high-yield mutual funds. Some of that money has spilled over into loans, dealers say, helping to prop up prices. Under normal circumstances, the recent inflows would hardly be worth talking about. Set against today's sparse new-issue landscape, however, they have had an outsized effect. After all, excluding DIPs, arrangers have managed to print just $579 million in new institutional paper year-to-date. This follows December's complete new-issue blackout, a first in the 13 years that LCD has been tracking new-issue volume. Of course, it's not all good news in loan-land as default rates continue to climb. Indeed, January produced a bumper crop of bankruptcies. In all, five institutional issuers filed during the month, putting $8.8 billion of new loans into default. For default rates, the results were mixed. The default rate by principal amount soared to a 5.5-year high of 4.95% even as the rate by number eased to 4.18%. Looking ahead, accounts expect default rates to push into the low double-digits by year-end. The combination of better technical conditions and rising default
rates has caused bifurcation in the loan market with the most highly
rated loans in desirable sectors enjoying a significant rally from the
beaten down levels of December, while more vulnerable segments of the
market continue to wallow at sub-50 trading prices. Steven Miller is managing director at Standard & Poor's Leveraged Commentary and Data. |
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