CORRECTED-On rates worries, investors shun high-yield for loans

Fri Apr 12, 2013 11:19am EDT

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(Corrects second and penultimate and final paragraphs to show new record yields/spreads reached on Thursday not Wednesday, and third para on Lipper fund flow data)

By Joy Ferguson and Rachelle Kakouris

April 12 (IFR) - Fearful of rising interest rates, and concerned that high-yield bonds have had their run for now, investors have quickly shifted allegiances - and money - into the red-hot loan market instead.

As the yield-to-worst in junk bonds has plummeted to a record low of 5.47%, investors have moved away from high-yield and into leveraged loans.

So far in 2013, according to Lipper (a Thomson Reuters company), loan funds have gotten US$18.22bn in inflows - more than 10 times the US$1.71bn moved into high-yield funds.

"The loan market is going through the roof right now, and retail investors are pouring money into it," said Jeff Tjornehoj, head of Lipper Americas research.

"Though we can't trace their actions back to each account, it seems reasonable to me that in general they're rotating out of high-yield in order to increase their allocation to loan strategies."

Bank loans rank ahead of high-yield bonds in the capital structure, typically paying a cash coupon that resets in accordance with changes in the short-term interest rate - which makes them appealing when rates are rising.

As recently as last July, high-yield took in US$6.42bn compared to just US$924m flowing into the loan market.

But loan products have outpaced high-yield since then. In March just US$637m flowed into high-yield, compared to US$5.07bn for leverage loans.

NOT FOR EVERYONE

Even so, as retail investors race en masse into loans, some institutional managers advise otherwise.

Gershon Distenfeld, head of US high-yield for AllianceBernstein, said that on average, the loan universe still consists of lower-rated companies.

"The riskiest companies are able to bypass the high-yield market, because so many people are throwing money blindly," he said. "It's a situation where demand creates poor supply."

Distenfeld said that the constituents of the two markets are very different, with only about a 35% overlap of names issuing in both.

"The riskiest companies that historically would have had to come to the high-yield market - and pay 8%, 9%, 12% - can go to the loan market and finance themselves at L+350bp or 400bp," he said.

"The parent company's issuer rating is on average a full notch lower in the loan universe," he said. "It's not better quality. It's actually lower quality."

Even though retail money has been skewed towards loan funds, demand continues to be strong in the high-yield market amid the ongoing quest for yield.

In fact, primary market supply has not kept pace with demand from bond investors - which in turn has kept prices tightening. Deals from Toll Brothers and CNH Capital last week secured record low coupons in their respective maturities.

Toll Brothers priced a 10-year offering at 4.375% at par, while CNH Capital captured a 3.625% coupon on its five-year bullet notes.

"Issuers have a huge advantage in this market, and they are starting to take advantage of it," said one high-yield investor.

According to the Barclays index, the US yield-to-worst ended Thursday at 5.47%.

The previous record of 5.56% was recorded in mid-March. However, on a spread basis, the current market shows better value. The option-adjusted spread was 450bp on Thursday. The record low spread was 232.6bp on May 23 2007. (Reporting by Joy Ferguson and Rachelle Kakouris; Editing by Marc Carnegie)

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