Stability — the European levloan market’s greatest strength
The European leveraged loan market is proving its resilience. While investors flee the high yield bond market, new liquidity in the leveraged loan market continues to grow as European CLO issuance rumbles on. The steadfastness of these leveraged loan investors is a clear testament to the market’s true strength.
High yield bond market participants have spent the last few weeks scrambling to cope with a nasty surge in volatility. Issuers have watched their bonds sell off; investors, nursing sharp losses, have run for the exits.
Their leveraged loan counterparts, meanwhile, have remained exceedingly calm. Borrowers in that market have every reason to feel confident in their investors.
The panic that has led to outflows in high yield (and, for that matter, emerging markets, as well as a host of other asset classes) has been attributed more or less directly to comments made in late May by Ben Bernanke, chairman of the US Federal Reserve.
Markets love to be able to latch onto a phrase, loading it with greater and greater significance until it has assumed the quality of a vital lifeline or, at the other end of the spectrum, a catch-all reason for despair.
An example of the former was last year's "whatever it takes" commitment by ECB president Mario Draghi, speaking of his determination to preserve the euro. Bernanke's suggestion that the US might look to begin reducing its asset purchase programme that has underpinned the country's economy since November 2008 is a perfect example of the latter.
His words were unpopular to say the least — although doubtless needed as a useful reminder to market participants of something they should already have been aware of but have been conveniently ignoring, namely that such stimulus must have an end. Although Bernanke made clear that he would only consider such a move if the US economy showed sufficient recovery, some are fretting that it might damage that recovery.
Others simply don't like seeing the stuff they piled into losing them money — ignoring the better economic situation that the policy would imply, an attitude that EuroWeek has argued is perverse.
But not all investors are the same. The flow of funds into the volatile high yield market has long been considered somewhat “easy-come, easy-go”. As has been seen this year, investors can be pulled in very quickly, driven by short term profit goals. But at the earliest sign of a market flinch, they can switch out just as fast.
Leveraged loan investors, however, aren't so skittish — partly, of course, because they can't be. Bond investors can flit in and out of the market and make relative value plays to other asset classes. Loan investors can shun new deals, though, but that isn't happening. Despite Bernanke’s remarks, and despite even the clarification of the skin-in-the-game requirements for CLO managers, European CLO issuance has continued apace over the last month.
That another CLO (for Alcentra) was issued last week, just as the high yield market faced such dramatic outflows, is the most striking sign yet of a healthy investor attitude within the European levloan market.
Others should now take confidence from this. Against the high yield mayhem — which, granted, could be seen as a handy correction, as we argue elsewhere — leveraged loans look serene. Investors are in it for the long haul, and are continuing to invest. Now they just need a little more to invest in.