Capitalism without bankruptcy is like Christianity without hell !
Investors are falling back in love
with the U.S. leveraged-loan market.
In the first three weeks of 2017, investors
plowed $2.5 billion into loans to speculative-grade companies, accounting
for almost 2 percent of total assets managed by these funds, according to Bank
of America Merrill Lynch data. Investors are looking to take
advantage of the fact that these loans pay higher rates as benchmark
yields rise, as opposed to bonds, which are generally pegged to fixed
yields. But those who are piling into broad-market, passive loan funds may have
already forgotten recent history, which shows that this debt tends to do worse when it's this popular.
Here's the rub: The more money comes in, the more companies gain power over their lenders. As prices on their loans rise above 100 cents on the dollar, borrowers can simply go back to investors and demand to pay a lower rate. Indeed, about 73 percent of the JPMorgan Leveraged Loan Index is now trading over par, according to a Bloomberg News article by Krista Giovacco on Wednesday. In response, companies are repricing their debt at a torrid pace, setting a record in January and accounting for more than half of the month's loan sales.
Here's the rub: The more money comes in, the more companies gain power over their lenders. As prices on their loans rise above 100 cents on the dollar, borrowers can simply go back to investors and demand to pay a lower rate. Indeed, about 73 percent of the JPMorgan Leveraged Loan Index is now trading over par, according to a Bloomberg News article by Krista Giovacco on Wednesday. In response, companies are repricing their debt at a torrid pace, setting a record in January and accounting for more than half of the month's loan sales.
We don’t want to put money to work in credit when
prices are above par. We need to see some pain and dislocations for credit to
be an interesting strategy again.
We need to see bunkrupcies and a lot of them to have a
clear signal. Since 2008 with the aggressive monetary policies from the big 4
central banks the number of bankruptcies (including energy space) have been
minimal ! This is not a time to Sow (see the graph below)
Capitalism without bankruptcy is
like Christianity without hell
Frank Borman
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