Barclays Boosts 2013 Loan Forecast

The bank now expects that full-year leveraged loan issuance could reach $340 billion to $360 billion, making 2013 the second highest on record behind the LBO boom of 2007.

“The driver of the unexpected growth is largely due to increased retail demand due to duration fears,” Barclays credit strategist Eric Gross said. “Coming into the year, the expectation was that volatility would be low for the rest of the year. What we didn’t foresee was that fears of an early tapering would take hold in early May.”

Inflows into the leveraged loan market saw a significant increase after concerns started to spread that the Federal Reserve could soon start scaling back its $85 billion a month bond buyback program.

Leveraged loan mutual funds have seen $19.8 billion in inflows since the first week of May as high-yield bond mutual funds have experienced net outflows of nearly $5.5 billion over the same period, according to Lipper FMI. Inflows into leveraged loan funds so far this year now stand at almost $43 billion, while high-yield bond funds have suffered a net $8.9 billion in outflows.

As floating-rate instruments, leveraged loans are widely thought to provide a hedge against rising interest rates even as the value of fixed-rate assets such as high-yield bonds would deteriorate. Since May 1, the S&P Leveraged Loan Index has returned 0.8 percent, while the Merrill Lynch High Yield Master II Index returned -1.89 percent.

“This year we’ve seen strong retail demand for floating-rate product and that persisted through the sell-off in May and June,” Gross said.

Another factor precipitating Barclays’ increased leveraged loan issuance forecast is the strength of the CLO market this year. Year-to-date CLO creation, at more than $51 billion, is the strongest it has been since before the financial crisis.

Amid so much demand for the asset class, loan issuers have seized the opportunity to tap the market to cut their interest costs. Most leveraged loan issuance in 2013 has gone towards refinancing activity with the volume of loans to back LBOs and mergers and acquisition all coming down from 2012 levels, the bank said.

A lack of net new supply in the loan market coupled with high demand from investors has led to $181 billion of repricings through the first seven months of the year and will likely skew the supply towards refinancing activity through the remainder of the year, Barclays reckons. Said Gross: “We expect relatively low volatility for the rest of the year, but we think concerns about rate risk will continue to stoke demand for loans, which should lead to new issuance.”

Caleb Frazier is New York bureau chief for Thomson Reuters LPC.