The debt load for corporate borrowers is exceeding earnings and leverage is nearing all-time high levels, according to Michael Contopoulos, high yield credit strategist at BAML.
Retail investors are fleeing high yield bonds funds at a record pace of $7.1 billion this week, forcing fund managers to tap their cash reserves and sell some of their most liquid holdings to fund redemptions, even if they feel that the correction is a technical one.
Community banks have seized on a chance to book more loans as larger institutions tap the brakes. Large banks, who generally dominate the leveraged loan space, face increased regulatory scrutiny and are slower to back deals that may include high leverage. Smaller banks, as a result, are reporting better loan-to-deposit ratios that, along with stable net interest margins, are lifting earnings.
As banks look to find new sources of revenue, more and more of them are ramping up in asset-based lending.
The high yield market took todays Federal Reserve announcement in stride, though prices were down slightly on the secondary market. Investors caution that the greater challenge lies ahead in 2014.
A nascent private bond market in France is expected to grow significantly over the next two years and could ultimately challenge banks and other players in the U.S. debt market.
The speculative-grade default rate for Latin America and the Caribbean is on the rise, and this has been driving the emerging markets default rate higher, according to Standard and Poor's.
Market participants expect rising default rates and widening high yield credit spreads as the Federal Reserve considers ending its quantitative easing program, the International Association of Credit Portfolio Managers said.
Many smaller managers of consolidated loan obligations are finding they dont need the deep pockets and wide reputations of bigger players to bring new deals to market.
In the first year of life, a human baby triples its body weight. In 2012, the year that in some ways marked the true rebirth of U.S. collateralized loan obligations, new issue CLO volume quadrupled, to more than $55 billion from roughly $13 billion in 2011. Take that, human babies.
Firm: Small Business Investor Alliance
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