Leveraged Loan Exodus Deepens as Outflows Top $3 Billion

Investors pulled money out of U.S. loan funds at a record pace, withdrawing $3.3 billion in the week ended Dec. 19, as they grew increasingly spooked by market turmoil.

It was the fifth straight week of outflows of more than $1 billion, an exodus that’s driven prices to the lowest since September 2016, according to the S&P/LSTA Leveraged Loan Price Index. Investors withdrew around $3 billion from mutual funds that buy the debt, according to Lipper, while exchange-traded funds lost $299 million.

For much of the year capital poured into leveraged loans, drawn by debt investments that pay floating yields and offer protection against Federal Reserve rate hikes. Now the Fed is showing signs of slowing down, eroding investors’ incentive to buy loans. And fears of trade-war tensions, slowing growth and steep energy price declines have sapped fund managers’ appetite to take risk.

“With an uncertain rate story for 2019, on top of the persistent volatility, investors have started to move money away from loans,” Jon Poglitsch, portfolio manager and head of credit research at Highland Capital, said in an email.

The sell-off followed a rout in equities and high-yield bonds that began in early October. Since the middle of November, prices have spiraled down and the debt has surrendered its gains. Leveraged loans returned around 4 percent this year through the end of September.

Since then, loans lost about 3 percent even after interest payments, with 2 percent of the drop this month. The safer leveraged loans that trade more often have been hit harder: loans made to companies with relatively high junk ratings, those with grades of BB- or higher, have fallen more than those in the B range, or one tier lower.

The volatility has made it more difficult for the biggest buyers of loans, collateralized loan obligations, to step in to fill the gap. New CLO issuance has slowed, and likely won’t fully come back till late January or even February, said Brian Juliano, head of U.S. bank loan portfolios at PGIM Fixed Income.