By Selcuk Gokoluk & Alastair Marsh at Bloomberg
Europe’s leveraged-loan market is in freefall.
Prices for the riskiest loans to companies dropped for the 13th straight day on Wednesday, the longest run of declines since the global financial crisis, according to an S&P index tracking 95 billion euros ($106 billion) of debt. The yield premium that investors demand to hold bonds backed by such debt is at a record for collateralized loan obligations, or CLOs, sold since the market re-opened in 2013, according to Barclays Plc.
European leveraged loans have lost 1.9 percent on a total-return basis this year, even as defaults are contained by steady economic growth and low interest rates stemming from European Central Bank stimulus. Instead, investors are shunning risky assets due to concerns about commodities and emerging markets, and the selloff is being exacerbated by tighter regulations deterring banks from holding CLOs and leveraged loans.
“It is causing considerable volatility in the market and significantly reducing liquidity,” said Aza Teeuwen, a London-based portfolio manager at TwentyFour Asset Management, which oversees 5.5 billion pounds ($7.9 billion) of assets including CLOs. “The majority of CLO-selling is being driven by dealers lightening up inventories, and by redemptions from U.S. hedge funds, not because of fundamentals.”
The average extra yield investors require to hold B rated CLOs sold since the crisis has risen to more than 1,000 basis points over benchmark rates, according to indicative prices from Barclays. The cost of insuring European corporate debt is near the highest since June 2013, based on Markit iTraxx indexes of credit-default swaps.
Banks are ditching CLOs because tighter capital requirements have made them less profitable. Credit Suisse Group AG slashed its exposure by more than half in the four months ended January, according to presentation.
European leveraged loans returned 5.5 percent last year, the seventh straight gain, according to the S&P European Leveraged Loan Index. That compares with a 3 percent loss in the U.S.