financetom
Economy
financetom
/
Economy
/
US junk debt investors cautious of leveraged loans as economy slows
News World Market Environment Technology Personal Finance Politics Retail Business Economy Cryptocurrency Forex Stocks Market Commodities
US junk debt investors cautious of leveraged loans as economy slows
Aug 14, 2024 4:20 AM

(Reuters) - Leveraged loan deals are expected to pick back up after a stabilization in markets over the past week, although some investors say they are cautious about junk-rated loans if the economy weakens.

Borrowers pulled back on leveraged loan deals last week, following disappointing jobs data on Aug. 1 and Aug. 2 that raised forecasts for aggressive interest rate cuts and spurred concerns about lower-rated debt.

A total of six leveraged loans worth $3.3 billion sold last week, which falls well short of the $10 billion weekly average this year and is the worst week for issuance outside the holiday-shortened first week of July, according to PitchBook LCD data.

One junk-rated loan deal sold on Monday, airline JetBlue Airways' ( JBLU ) five-year term loan, according to PitchBook LCD. JetBlue ( JBLU ) originally sought a $1.25 billion loan, but downsized it to $750 million and upsized its bond offering to $2 billion from $1.5 billion, according to Informa Global Markets. JetBlue ( JBLU ) did not immediately respond to a request for comment.

At least two leveraged loan deals hit the market on Tuesday, including a $160 million add-on to virtual dataroom Datasite's cross-border term loan and a $253 million repricing of for-profit education operator Adtalem Global Education's ( ATGE ) term loan, according to PitchBook. Datasite and Adtalem did not immediately respond to a request for comment.

Lower rates can be good news for highly indebted companies.

"There's no doubt if the Fed ends up cutting more as is priced in currently, that's going to be a big relief for (those) borrowers," said Hans Mikkelsen, credit strategist at TD Securities.

"But (investors) can now expect to earn less going forward because of that, (and) there's going to be less availability of financing in the leveraged loan market (as a result)," he said.

Leveraged loan funds reported $3.1 billion in outflows last week, which is the most since March 2020, according to JPMorgan. That includes a record $2.4 billion outflow from exchange-traded funds.

The Morningstar LSTA US Leveraged Loan Index fell 0.55% on Aug. 5, the worst daily performance for the index since the collapse of Silicon Valley Bank in March 2023. The index has since clawed back these losses.

"For leveraged loans, a wave of volatility did throw a wrench into the works for the loan primary... forcing several opportunistic transactions to the sidelines," said Marina Lukatsky, global head of credit research at Pitchbook.

These included deals for investment firm Focus Financial Partners, theme park owner SeaWorld Entertainment (owned by United Parks & Resorts Inc. ( PRKS )), and wireless provider SBA Communications ( SBAC ), according to Lukatsky. The companies did not immediately respond to a request for comment.

"I think we will see a pickup in primary issuance in both markets," said Jeremy Burton, portfolio manager for U.S. high yield and leveraged loans at PineBridge Investments.

"In the loan market, there were a number of repricings (and) refinancings that were either pulled or just didn't launch...we could see some of those come back," he said.

A gap between net loan supply and investor demand since the Fed began hiking rates in 2022 should sustain demand for new loan deals through the end of this year, according to Lukatsky. She estimated that investor demand this year exceeded net loan supply by at least $130 billion as of July 31.

But headed into 2025, further signs of an economic slowdown and aggressive Fed rate cuts could prove detrimental to certain leveraged borrowers' refinancing or new loan plans.

"Getting away from (last) week, I think investors will be focused on the potential for a slowing in the economy," said PineBridge's Burton.

Comments
Welcome to financetom comments! Please keep conversations courteous and on-topic. To fosterproductive and respectful conversations, you may see comments from our Community Managers.
Sign up to post
Sort by
Show More Comments
Related Articles >
Zoomed Out | Critical Minerals — why India's current strategy to become self-reliant is so vital
Zoomed Out | Critical Minerals — why India's current strategy to become self-reliant is so vital
Nov 29, 2023
Internationally, there are genuine security concerns related to the criticality in building more diverse and dependable value chains for critical minerals, about their environmental and social sustainability, and technological challenges. While, India has taken the right steps for creating an ecosystem for accelerated exploration and production of critical and new age minerals, observes FICCI Mining Committee Co-Chair Pankaj Satija.
JPMorgan has a new way to gauge its green progress
JPMorgan has a new way to gauge its green progress
Nov 15, 2023
As the largest energy banker, JPMorgan is a frequent target of criticism over Wall Street’s role in the climate crisis. At the same time, the bank is a leading US arranger of green bonds, making it vulnerable to Republicans seeking to protect the fossil fuel industry.
India looking into 'freak' incidents like damage to Sikkim's Chungthang dam: RK Singh
India looking into 'freak' incidents like damage to Sikkim's Chungthang dam: RK Singh
Oct 18, 2023
Stressing on the need to have quick ramp up and ramp down energy sources for grid balancing, the minister described hydroelectric power's role as essential in the path to energy transition as wind energy is intermittent and the sun doesn't shine 24×7.
In fight to curb climate change, a grim report shows world is struggling to get on track
In fight to curb climate change, a grim report shows world is struggling to get on track
Nov 14, 2023
The State of Climate Action report released on Tuesday by the World Resources Institute, Climate Action Tracker, the Bezos Earth Fund and others looks at what's needed in several sectors of the global economy power, transportation, buildings, industry, finance and forestry to fit in a world that limits warming to 1.5 degrees Celsius (2.7 degrees Fahrenheit) over pre-industrial times, the goal the world adopted at Paris in 2015. The globe has already warmed about 1.2 degrees Celsius (2.2 degrees Fahrenheit) since the mid-19th century.
Copyright 2023-2025 - www.financetom.com All Rights Reserved