U.S. companies have been able to take advantage of investor appetite for junk loans, with nearly $400 billion of debt being revalued at lower interest rates this year. The easing of financing conditions for U.S. companies has been attributed to the equivalent of two quarter-point cuts by the Federal Reserve. Demand has been driven by investment vehicles and fund managers, leading to a record share of issuance from borrowers rolling over their loans rather than selling new debt.
Companies like Citrix parent Cloud Software Group and healthcare company Medline have reduced borrowing costs on multi-billion dollar loans this year. The strong demand for leveraged loans has caused prices of existing loans to rise above their face value, allowing companies to lower borrowing costs. CLO issuance, which accounts for two-thirds of the U.S. leveraged loan demand, has nearly doubled to $100 billion so far in 2024.
Despite the opportunity to reduce costs, weaker borrowers have been left behind in this wave of repricing deals. Some low-rated companies have weathered high-interest rates better than expected, thanks to a strong U.S. economy. However, interest expenses for loan originators remain significantly higher than in previous years, limiting the impact of lowering rates for some companies.
The current situation has been described as a paradox by strategists, with delayed easing measures from the Federal Reserve boosting demand for leveraged loans. The market faces a limited pool of loans available, driving up prices above or around parity. Bankers have noted a lot of energy surrounding the purchase of triple-A grade CLO tranches, driving an increase in these vehicles.
Analysts and investors have highlighted that cutting interest costs can certainly help a company, but it is not a game-changer in the current financial environment. Higher-quality subprime loan issuers have been able to take advantage of the opportunity to refinance at lower rates, while weaker borrowers continue to face challenges. The U.S. interest rates have remained higher than in previous years, impacting the overall cost of debt for companies looking to revalue their existing loans. The predictions about future monetary policy have fluctuated, with investors initially expecting multiple rate cuts this year, but now betting on fewer than two.
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https://www.ft.com/content/866cfe14-0512-4411-b843-7aa0bf8a642a
