Investors who follow the leveraged loan market might be feeling a bit like a New Yorker in a downpour, or a Londoner at rush hour, trying to hail a car using Uber. With demand shooting up, they are witnessing “surge pricing”.
Uber itself tapped the market last week, in a $1.15bn fundraising to fuel growth in its ride-hailing service. But overall issuance has been sluggish in the US. Merger and acquisition activity has come off the boil, meaning fewer deals that need to get financed with debt, and private equity firms are complaining that public companies are too expensive to justify launching buyouts.
So supply is tight, just as demand is returning.
Last year, the largest leveraged loan ETF suffered outflows of $1.3bn, but it has made back half of that since March — helping push up the average price of a loan in the S&P/LSTA 100 index to 92 cents on the dollar from below 86 cents at the nadir in February.
Leveraged loans are low risk for investors, because they have a variable interest rate and get repaid before bonds. However, the oil price collapse raised concerns about the solvency of oil explorers and other commodities plays which have borrowed in the loan market. Loan prices have appeared to move ever more closely in sync with the oil price in the past few years, but recent trading suggests that link is breaking.
While the oil price has fallen back since the start of July, loan prices just keep marching ahead.
That break was overdue. Oil companies account for less than 5 per cent of the index — a fact that has sometimes got lost amid all the concern about the high-yield bond market, a sister market whose index is much more heavily weighted towards the oil and gas industry.
Loans offer a decent yield for conservative investors, in the region of 4 to 5 per cent. Uber, one of the riskier propositions, agreed to pay near the top of that range.
As a result, with ultra-low rates looming like stormclouds over ever-larger swaths of the credit markets, demand seems more likely to increase than decrease, as long as the US economy holds up. Unlike Uber customers, loan buyers may find the surge pricing does not come to an end any time soon.
stephen.foley@ft.com
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