Leveraged Loans - Another Good Year

Leveraged loans have made a tremendous comeback in the last two years (yeah, what hasn't) and I fully expect that we will see a continuation of this in 2012.  If you want to play in the high yield markets, why not play where you might actually get some covenants (there is a reason loans do better in bankruptcy and earn more fees along the way).  The only issue for some institutional investors is that loans are not securities and many mandates specify securities as permissible investments.  Loans also help in a rising rate environment as they float and will float up (although keep this in mind when you are doing your analysis as the float up - unless swapped - can cost a company dearly).

(Bloomberg) Leveraged-loan issuance in the U.S. more than doubled this year, as private-equity firms sought funds for buyouts and borrowers refinanced debt amid a rebound from the worst financial crisis since the Great Depression.

More than $369 billion of loans were raised as of Dec. 28, led by financing for the purchases of Tomkins Plc and Burger King Holdings Inc., up from $170 billion in 2009, according to data compiled by Bloomberg. Interest rates fell to 3.91 percentage points more than the London interbank offered rate on average, from 10.28 percentage points at the end of 2009, according to Standard & Poor’s Leveraged Commentary and Data.

The S&P/LSTA U.S. Leveraged Loan 100 Index returned 9.35 percent this year as of Dec. 28, following last year’s 52.23 percent. In 2008 the index lost 28.2 percent. Gains for 2009 compare with 14.7 percent for junk bonds, based on the Bank of America Merrill Lynch U.S. High Yield Master II Index. 

 Leveraged loan index vs. SPY.  (Courtesy Bloomberg).