- Leveraged loans are made to companies with weak balance sheets and poor credit profiles.
- They often are blamed for helping cause the financial crisis due to the high levels of corporate debt and opaque nature of the securities used to package them.
- Mutual funds for leveraged loans have seen huge outflows in recent months, with investors pulling 16 percent of total assets since September’s peak.
everaged loans, which helped cause the last financial crisis and have drawn fear that they could be a spark in the next one, are showing further signs of cracking as investors flock from the market and volumes dry up.
Mutual funds that track the debt issued traditionally to companies with weak balance sheets and poor credit have seen $18 billion in outflows over the past 10 weeks, including $949 million for the period ended Jan. 23, according to data Refinitiv’s LPC team released Tuesday.
For perspective, the funds have total assets now of $148 billion. The funds have seen investors pull 16 percent of assets since the space peaked in September at $175 billion.
Performance of corporate debt actually has been decent: As a group, bank loans have managed to eke out a 2.2 percent return so far in 2019, according to Morningstar. The returns are positive though well below the performance of most other fund categories.
However, investors appear to be getting edgy after some high-profile warnings about potential danger spots.
Former Federal Reserve Chair Janet Yellen, for instance, said in December that the leveraged loan industry, which now boasts around $1.3 trillion in assets, is one area where risk-taking could exacerbate an economic downturn. Moody’s Investors Service, which rates the debt, said covenant quality, or the protection banks and investors get for the loans, has reached historic lows.