Salient to Investors:
Second-lien loan issuance has climbed to $17.1 billion in 2013, versus $18.6 billion in all of 2012 and on pace to beat the record $28.7 billion issued in 2007.
Second-lien loans have fallen 0.3 percent since Bernanke said the Fed could pare QE, while junk bonds have lost 9 times more.
John Bell at Loomis Sayles said a second-lien loan is effectively a high-yield bond in disguise: with notably more yield and low-default expectations in general on the demand side.
S&P LCD said second-lien loans yield 7.7 percent above LIBOR, down from 9.1 percent at the start of 2013, while first-lien loans yield 3.84 percent above LIBOR
Moody’s said the trailing 12-month leveraged loan default rate declined to 2.5 percent in May versus 9.4 percent in August 2009.
Scott Baskind at Invesco said in a benign default environment investors are willing to step down the capital structure, and investor demand for risk assets with juicier yields is very strong – more issuance of second-lien debt is a natural evolution of the supply-demand imbalance.
Bank of America said funds that purchase loans have seen deposits increase 38 percent increase since the start of 2013.
David Breazzano at DDJ Capital Mgmt said junior loan borrowings fit in between first-lien loans and bonds in a company’s capital structure, and issuers may have restrictions in their credit agreements limiting senior ranking debt. Breazzano said first-lien investors may demand an interest premium to lend to a borrower whose leverage is too high, so the issuer may reduce the size of the senior loan and pay a higher rate on a smaller second-lien loan and may end up offering a better overall rate.
Click here to receive free and immediate email alerts of the latest forecasts.