Anonymous ID: 158970 Dec. 14, 2018, 4:49 p.m. No.4315005   🗄️.is 🔗kun   >>5018 >>5152

"If This Continues, We’re Going To Start Hearing Some Fund Liquidity Issues"

 

Up until the end of September, credit investors in particular and Wall Street in general had nothing but good things to say about the leveraged loan market and demand for new issuance seemed relentless, despite growing warnings from various third parties and websites such as this one. And then, loan pricing nose-dived along with prices on most other credit products starting around the first week of October, right after Powell's "neutral rate" speech…

 

… and suddenly complacency turned to sheer panic without passing go. But the catalyst for this wholesale dread was not so much the slump in prices as much as fund flows - i.e., observing in real time what one's peers are doing - and as we showed yesterday, they are selling, with Lipper reporting that loan funds saw a record outflow of $2.53 billion in the week ended December 12, a fitting culmination to the fourth consecutive week of selling.

 

And then, as if on cue, the soundbites from the very same "concerned" investors who until two months ago were rushing to rushing to 4x oversubscribe any new loan deal, preferably with zero covenant protection, mutated into a cannonade of fear.

 

"Having outflows that are 2 to 3 percent of the market is scary. What happens if we get 10 or 15 percent?” Distenfeld, co-head of fixed income at AllianceBernstein, said on Bloomberg TV Friday. He has long been skeptical of the market. "I’m worried if this continues, we’re going to start hearing some liquidity fund issues from open-ended mutual funds."

 

in addition to fears about declining rates - the primary attaction for floating-rate debt - some are worried that the bottom is about to drop out of the CLO market. As a reminder, the total outstanding volume of leveraged loans is about $1,130bn (~5.5% of GDP); of this universe, CLOs - which are repackaged corporate debt that has made up “most of the appetite” for loans - hold approximately half, or $600bn (~3% of GDP) of the total loans outstanding.

And like the broader space, while CLOs had been on a feeding frenzy for much of this year, in the wake of recent widespread market volatility and sliding prices, demand has waned, even causing some investors to pull offerings as we reported last night.

 

"When that changes and you’re seeing that supply demand come out of balance, who are you going to attract?” Gaffney said on Bloomberg TV. "The ones that are going to come in are probably more like me, total return, that are looking for much bigger discounts than that market has seen since 2008."

 

In other words, deals will get done, sure, but at much lower prices and higher yields, resulting in even tighter financial conditions as companies are forced to allocate even more of their cash flow to paying interest.

 

To some investors the lower prices would represent a buying opportunity and a sign that loans still have a lot of value. Others including Steven Oh, global head of credit and fixed income at PineBridge Investments, say that leveraged loans are unlikely to cause systemic risk. While leverage levels are elevated like in the last recession, interest rates are much lower, so debt service is actually healthier, he said in an interview this week.

 

Goldman Sachs agrees, and writes on Friday that risk from runs on bank short-term liabilities as a result of losses on leveraged loans and CLOs is low as banks now own less than 5% of the outstanding leverage loans, down from 30% 20 years ago as the share of institutional investors has risen to 90%, while their exposure to riskier junior CLO tranches is relatively little.

rest below

 

https://www.zerohedge.com/news/2018-12-14/if-continues-were-going-start-hearing-some-fund-liquidity-issues

 

The hedgies will start to limit client redemptions because they will be forced to sell assets to keep up with the carrying cost(s).

When you are levered up, in some cases 30x these 2-3% down days have quite the effect.