Leveraged Loan Market Heats Up: Demand Drives Prices Higher
Key Takeaway:
Demand for leveraged loans is surging, pushing prices close to face value and reducing the availability of discounted offerings.
Details:
* Loans to X Holdings Corp., previously held by banks at deep discounts, are now being sold at full value.
* New loan offerings are increasingly sold at par (100 cents on the dollar) or higher.
* Barclays reports that the average price of new loans in 2024 reached 99.66 cents, a significant increase from previous years.
* Loans with larger initial discounts have historically outperformed those issued close to par in the first 12 months.
* Investors are eager for floating-rate loans amid rising inflation concerns.
* Elon Musk's ties to the White House have boosted demand for X Holdings Corp.'s loans.
* The share of leveraged loans priced at or below 95 cents on the dollar has declined sharply.
* In 2024, only a small number of new-money deals were issued with meaningful discounts.
* The surge in demand has outpaced supply, reducing the reliance on original issue discounts (OIDs) to attract investors.
* Loans issued at substantial discounts tend to outperform in the secondary market in the short term.
* However, Barclays cautions that OIDs alone cannot explain the strong performance and that it typically tapers off after 12 months.
* Some investors view the junk bond market as offering better opportunities at present due to higher discounts to par.