Last weekend, we suggested that the leveraged loan bubble might be bursting amid shrill cries from a veritable laundry list of “name brand” entities and individuals who pretty much universally insist that the market is a screeching tea kettle just waiting to explode.
And you know, it’s probably not accurate to say “we suggested” in this context. That conveys some kind of special insight and/or prescience when all that’s really required to understand this scenario is common sense. Here’s a quick recap, excerpted from last Saturday’s deadpan missive (linked below):
This is a ~$1.1 trillion market and the appetite for these deals has grown in an environment where folks are after floating-rate debt as the Fed hikes rates. Obviously, the more demand there is for these deals (e.g., from CLOs), the more competition they’ll be to get them done. The more competition there is, the looser the standards, hence the disconcertingly high percentage of cov-lite deals (something like 80% of outstanding loans as of the end of August). As you’ve probably heard, CLOs have been on fire and the securitization machine got an extra boost from the repeal of risk-retention rules (a development celebrated by many).
So there’s that. And here’s this:
That rather unfortunate looking chart is the benchmark and as you can see, the market is in free fall. According to Lipper, leveraged loan funds hemorrhaged another $1.32 billion in the week through Wednesday, bringing the two-week exodus to a truly outrageous $3.06 billion. Assuming these flows lag the actual market, that’s probably going to accelerate going forward.
In the linked post above, we documented the recent trials and tribulations of the Invesco Senior Loan ETF and suffice to say things haven’t improved for the vehicle. It’s sitting at a hapless, 32-month nadir and bleeding cash all over the place. Look at this:
So that’s daily flows in the top pane and as you can see, investors have withdrawn money in 10 of the last dozen sessions with the only reprieves coming on days when there was no activity. Here’s a panned out version with total assets plotted in green and simple volume in the bottom pane:
Total assets are now at their lowest levels since early October of 2016 and it sounds like most people believe there’s a negative seasonal going on here too. Oh, and of course there’s the generalized malaise across credit markets.
If there’s anything positive to say about this, it’s that investors are now back in the driver’s seat in terms of pushing back on absurd structures that offer little to no protection for buyers. And by “buyers” we
definitively do don’t mean falling-knife-catchers.