Monday, November 19, 2012

Another record month for leveraged loan funds

If you look at the chart from last week that shows outflows from high yield funds (see discussion), one thing that stands out is that loan funds are still seeing inflows. Part of the HY outflows actually ended up going to leveraged loans, as the recent uncertainty pushed investors to move higher in the capital structure. In fact loan funds AUM hit a new record in October.

Source: LCD

One of the reasons for the increase is the new addition to the loan fund universe - the Blackstone/GSO Strategic Credit Fund (BGB), a closed-end (mostly) loan fund ($834 million). GSO (Matt Quigley) is getting into retail as they try to take on BlackRock using their leveraged loans expertise. It sure beats raising hedge fund money which is always at risk of being redeemed. With a closed-end fund, investors can't redeem - they can only sell the fund. This is what managers call "permanent capital".

The loan index itself stalled recently, following the equity market. But inflows seem to be continuing as investors can't get enough of "high" yielding floating rate assets (see discussion).
LCD: - Managers say that for the moment at least, uncertainty is playing to the strength of the asset class as a way to generate decent yields – of 4-5% on open-end funds and 6-7% on leveraged close-end funds – in a yield-starved market while hedging [by moving up the capital structure because loans are senior to bonds] against a bad outcome that could result in rising default rates.
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