Jun 24, 2021 - Economy & Business

The floating rate debt play

Man holding stack of dollars

Illustration: Aïda Amer/Axios

Investors are buying into corporate loan funds at a rapid clip — and that's likely to continue as they position for a rising rate environment.

Why it matters: Interest on this type of debt, known as leveraged loans, goes up when rates go up — since it's tied to benchmarks like Libor which can rise and fall.

  • Leveraged loans provide liquidity to below-investment-grade companies when they need cash. They're also a crucial part of the financing for M&A and private equity buyouts.

What they're saying: More investor demand for these loans will enable even more buyouts as PE firms look to deploy the mountains of dry powder they’re sitting on, Paul Raskin, senior analyst at Neuberger Berman, tells Axios.

The big picture: Floating rate mutual funds, a major buyer of leveraged loans, have seen net inflows of $25 billion this year, compared to outflows of about $25.5 billion in the same period last year, according to financial data provider EPFR.

  • The other major buyers of leveraged loans are structured vehicles known as CLOs (collateralized loan obligations), which are being issued at a feverish pace.

Of note: Also making leveraged loans attractive to investors right now are low default rates. Defaults by weaker companies were pulled forward last year during the pandemic, and they're expected to be historically low over the next few years, Raskin says.

The bottom line: Expect the inflows to leveraged loan funds to continue for the foreseeable future.

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