Pimco’s MacLean: Loans Won’t Repeat 2012 Performance

Thursday, 18 Oct 2012 04:33 PM

 

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U.S. leveraged-loan returns in 2013 won’t match this year’s performance, according to Beth MacLean, a money manager at Pacific Investment Management Co.

“We’re not going to repeat” 2012’s results, MacLean said Wednesday during a panel at the Loan Syndications and Trading Association’s annual conference in New York. “A lot of the capital gains have been taken out of the market.” Newport Beach, California-based Pimco is manager of the world’s biggest bond fund.

Leveraged loans have returned 9.7 percent so far in 2012, according to the Standard & Poor’s/LSTA U.S. Leveraged Loan 100 index. The high-yield debt is on pace to reach 12.3 percent by year-end for what would be the second-best annual return on record, the index shows.

The Federal Reserve has pledged to keep interest rates near zero through mid-2015, spurring investors to take on more risk in junk-category loans as they hunt for yield. Loan prices have climbed 5.5 cents this year to 96.29 cents on the dollar, reaching a 19-month high on Sept. 21, according to the S&P/LSTA loan index.

The Fed is “pushing everyone out the risk spectrum” to look for new ways to invest, MacLean said. Senior-secured loans are providing investors with attractive all-in coupons because floors on the London interbank offered rate are “so pervasive,” she said.

More than 95 percent of loans sold to non-bank investors this year have Libor floors, Meredith Coffey, executive vice president of the LSTA, said in an e-mail, citing research from S&P Capital IQ Leveraged Commentary & Data.

Libor Floor

As of September, 61 percent of loans in the S&P/LSTA loan index had Libor floors, she said.

Libor is the lending benchmark for leveraged loans, a type of high-yield, high-risk debt ranked below Baa3 by Moody’s Investors Service and less than BBB- by S&P.

While three-month Libor was 0.32 percent Thursday for U.S. dollar loans, corporate borrowers offered investors an average minimum on the lending benchmark of 1.33 percent in September, according to data compiled by Bloomberg.

Loans typically produce an annual return of 5 percent, according to Markit Group Ltd. Last year, the debt returned 0.62 percent as loan prices dropped 5.7 cents to 90.75 cents at the end of 2011 from a peak of 96.48 in February, according to the S&P/LSTA loan index.

Most LSTA members attending Wednesday’s conference expect 2013 returns will range from 4 percent to 8 percent, according to an audience survey taken during one of the panels. Of those surveyed, 39.1 percent said gains would be 6 percent to 8 percent, while 38.8 percent expect leveraged loans will return 4 percent to 6 percent.

Junk bonds have returned 13.4 percent this year, according to the Bank of America Merrill Lynch index, while the S&P 500 Index has rallied 16.2 percent, Bloomberg data show.

© Copyright 2014 Bloomberg News. All rights reserved.

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