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Jump in CLO Issuance Puts Pressure on Leveraged Loan Margins

June 13, 2018, 08:01 AM
Filed Under: Industry News

Leveraged lending was higher in May, taking year to date volume past the $500 billion mark, according to the latest data from Thomson Reuters. Volume was driven by a jump in institutional activity, which accounts for 69% of issuance this year. Although levels are down 18% from last year, the institutional share has stood firm at around 69%.  But thanks to increased foreign investment in collatoralized loan obligatons (CLO), margins are shrinking to levels not seen in a decade, data shows.

Refinancing activity remains the main driver of leveraged loan activity, with a 70% share of issuance so far into the second quarter, in line with last year’s trend.

Institutional issuance jumped in May, taking YTD volume to $366 billion, which is 18% below levels from last year. High-yield bonds added $15 billion in May, taking YTD issuance to $93 billion, down 28% year-over-year.

Looking at the drivers behind institutional issuance, roughly one-third of year-to-date issuance was for new-money purposes, compared to 27% a year ago. Overall, institutional new money is down 7% year-over-year, with refinancing volume down 21%.

May default activity was flat over the previous month with $751 million of defaulted par recorded. The trailing twelve-month default rate dropped to 2.5%, according to Fitch. There has been $13.4 billion in defaulted par so far this year, with iHeartCommunications making up $6.3 billion of defaulted volume.

Meanwhile, margins on leveraged loans are shrinking to close to pre-crisis levels, in part due to a spike in CLO issuance, analysts say. According to JPMorgan’s benchmark index, the premium paid on top-rated leveraged loans above LIBOR has pushed to below 190 basis points, the lowest levels since 2007. About $57 billion of institutional loans have recently priced at 175 basis points, Bloomberg reports.

“The signals that we may get to L+150 are there,” said Corey Geis, director of capital markets and head trader at Marble Point Credit, told Bloomberg. “I don’t think it’s a function of ‘if,’ I think it’s a function of ‘when.’”

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