Barclays has hiked its US leveraged loan issuance forecast by between $110 billion to $115 billion, according to a report published by Bloomberg on Friday.
The increase would put total US issuance between $340 billion and $360 billion on the year, according to the report, which cites fears surrounding length of duration as the primary reason for the adjusted forecast.
“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,” credit strategist Eric Gross told Bloomberg. Barclays did not respond to a request for comment at press time.
US interest rates have begun to creep up in anticipation of a tapering of the Federal Reserve’s quantitative easing strategies. Although the Fed has yet to commence the wind down of its monthly purchase of $85 billion in assets, Chairman Ben Bernanke has indicated that it may do so as early as next year. Such a move would likely lead to higher interest rates as well.
The prospect of a spike in interest rates has led many investors to shift their allocations into leveraged loan funds, as opposed to high yield, according to Bloomberg.
The health of the leveraged loan market hasn’t gone unnoticed by US investors. In a program overview released as part of its 20 August meeting materials, the Employees Retirement System of Texas indicated that: “LBO loan volume has recovered from its trough in 2008 and 2009, but remains well below its 2007 peak. Refinancings, however, are near all-time highs as low interest rates persist and financial sponsors have been actively pursuing refinancing opportunities.”
Texas ERS also cited the rapid expansion of the US CLO market, which Bloomberg pegs at $51 billion so far. That year-to-date total is the largest since the financial crisis.