US leveraged loan prices slump to lowest since financial crisis

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US leveraged loan prices have sunk to their lowest level since the financial crisis, as investors reassess the ability of companies to keep servicing heavy debts in light of the coronavirus outbreak.

The average leveraged loan in the US — a type of credit typically used by low-rated, heavily indebted companies — has sunk to just 84 cents on the dollar, according to an index run by the Loan Syndications and Trading Association. That is its weakest since August 2009, eclipsing a 2016 mini-crisis associated with a drop in the oil price.

Issuance of such loans has exploded to about $1.3tn outstanding in recent years, as investors starved of income have been happy to take greater risk.

“The extraordinary uncertainty is gyrating all markets and the loan market is no exception,” said Andrew Sveen, co-director of floating rate loans at Eaton Vance, which runs one of the largest loan mutual funds.

A series of cuts in interest rates has also dented the appeal of leveraged loans, which pay a floating rate of interest that tracks the Federal Reserve’s policy rate.

Invesco Oppenheimer’s floating rate fund has posted losses of 13.3 per cent so far this year. Similar funds run by Fidelity and Lord Abbett have notched negative returns of 12.2 per cent and 11.5 per cent, respectively.

Meanwhile, pressure has continued to mount in other corners of the corporate debt market, with investors demanding extra compensation to hold riskier assets. The additional yield above Treasuries on US junk-rated bonds jumped by more than 1 percentage point on Monday to 8.4 percentage points, closing in on its February 2016 high of 8.9 points.

The sharp sell-off marked the biggest one-day jump in spreads since last Monday’s rout and the second-largest increase since October 2008, when the global financial crisis began to intensify.

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