Corporate debt: leveraged loan holders pray for a soft landing

Not everything in fixed securities is nailed like the name. Floating rate leveraged corporate loans have been among the hottest debt products marketed on Wall Street in recent years.

Financial engineers have prepared what are known as “collateralized loan liabilities” and attached corporate loan databases to slices of variable risk. Many of these loans will be priced at a margin that floats above the reference rate. They are meant to be used as a hedge when the interest rate is finally swept upwards from zero.

Trillions of dollars were issued from these loans, long before the junk bond market. Insurers eagerly swallowed the top-rated newspaper.

The high interest rate days have now arrived. Loan holders are enjoying higher interest payments for now. But no one wants to see a softer economic landing than them. These increased cash flows are of little use if issuers do not have default deadlines

These concerns were formed last week when the Fed raised its interest rate by 75 basis points against the backdrop of soaring inflation. The S&P LSTA loan index fell by 1.11% and reduced annual yields to 2.79%.

New deals are rare, given the cost of resetting capital. The funding for the high-profile LBO Intertape Polymer Group by Clearlake Capital is an illustration.

Intertape recently sold junk bonds at a heavy effective yield of 14 percent. The senior loan component – $ 1.5 billion – had to offer an initial yield of 8 percent, including an initial discount price of 92 cents on the dollar. In such deals, Wall Street banks pledged Pricing months ago when conditions were more favorable.Losses may be significant unless markets recover.

The default rate of the loan, according to S&P data, reached an all-time low in April, at only 0.26 percent. The economy and consumer spending have remained sustainable for the time being. But it seems that the Fed intends to crush inflation by all necessary means.

The question investors need to ask themselves is this. How likely is it that there will be protection against inflation, once they have erased the cost of paper which becomes worthless?

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Corporate debt: leveraged loan holders pray for a soft landing Source link Corporate debt: leveraged loan holders pray for a soft landing

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