Barclays boosts full-year loan issuance forecast
NEW YORK, Aug 16 (RLPC) - Barclays increased its 2013 US leveraged loan issuance forecast by US$110bn-$115bn last week, citing robust demand for the asset class in a rising interest rate environment.
The bank now expects that full-year leveraged loan issuance could reach US$340bn-$360bn, making 2013 the second highest on record behind the LBO boom of 2007.
"The driver of the unexpected growth is largely due to increased retail demand due to duration fears," Barclays credit strategist Eric Gross said.
"Coming into the year, the expectation was that volatility would be low for the rest of the year. What we didn't foresee was that fears of an early tapering would take hold in early May."
Inflows into the leveraged loan market saw a significant increase after concerns started to spread that the Federal Reserve could soon start scaling back its US$85bn a month bond buyback programme.
Leveraged loan mutual funds have seen US$19.8bn in inflows since the first week of May as high-yield bond mutual funds have experienced net outflows of nearly US$5.5bn over the same period, according to Lipper FMI.
Inflows into leveraged loan funds so far this year now stand at almost US$43bn, while high-yield bond funds have suffered a net US$8.9bn in outflows.
As floating-rate instruments, leveraged loans are widely thought to provide a hedge against rising interest rates even as the value of fixed-rate assets such as high-yield bonds would deteriorate.
Since May 1, the S&P Leveraged Loan Index has returned 0.8%, while the Merrill Lynch High Yield Master II Index returned -1.89%.
"This year we've seen strong retail demand for floating-rate product and that persisted through the sell-off in May and June," Gross said.
Another factor behind Barclays' increased leveraged loan issuance forecast is the strength of the CLO market this year. Year-to-date CLO creation, at more than US$51bn, is the strongest it has been since before the financial crisis.
Amid so much demand for the asset class, loan issuers have seized the opportunity to tap the market to cut their interest costs. Most leveraged loan issuance in 2013 has gone towards refinancing activity with the volume of loans to back LBOs and mergers and acquisition all coming down from 2012 levels, the bank said.
A lack of net new supply in the loan market coupled with high demand from investors has led to US$181bn of repricings through the first seven months of the year and will likely skew the supply towards refinancing activity through the remainder of the year, reckons Barclays.
"We expect relatively low volatility for the rest of the year, but we think concerns about rate risk will continue to stoke demand for loans, which should lead to new issuance," said Gross.