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Accept Decline
by  BlueBay Fixed Income team May 23, 2023

Today’s markets move fast. To keep you up to speed each week, Andrzej Skiba, CFA, Head of US Fixed Income and members of his investment team will deliver forward-looking market commentary and insights into what’s driving fixed income markets over the coming week.

RBC GAM’s US fixed income capabilities span the spectrum of the spectrum of the US Credit market, ranging from short-dated money markets, Treasuries, corporate credit investment grade and high yield, securitized credit, impact investing as well as opportunities overseas. Topics of conversation will vary based on what is most relevant each week, and will include both top-down and bottom-up perspectives.

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Here are highlights from this week’s video:

  • The debt of corporations which have a high level of debt relative to earnings
  • Market made up of high yield corporate bonds and leveraged loans
  • Leveraged loans encompass broadly syndicated loans and private debt or direct lending
  • The private/direct lending portion of the market is illiquid, and information is harder to come by

View transcript

Hello & welcome back to the weekly fix. My name is Tim Leary & I’m a Senior Portfolio Manager on the BlueBay Leveraged Finance Team at RBC Global Asset Management.

I’m sure by now you’re sick & tired of hearing about the debt ceiling, interest rates or inflation.

I thought I’d spend a bit of time today drilling down into some numbers behind the Leveraged Finance market.

First of all, what do we mean when we say Leveraged Finance?

Generally speaking, we’re referring to the debt of corporations who have a high level of debt relative to their EBITDA. I’ll break this down into three categories:

The first would include High yield rated corporate bonds---The dreaded junk bond market--that every radio host loves to hate. The US HY market has about $1.4 Trillion of bonds outstanding worth $1.22 trillion in market value. It’s about 60% of the Global HY Bond Market – but for purposes of this discussion, let’s exclude non-dollar debt.

The second group includes leveraged loans – floating rate debt instruments that are governed by a credit agreement as opposed to a bond indenture.

Leveraged loans that are syndicated to the institutional market are referred to as broadly syndicated loans or BSLs. This includes debt instruments like “Term Loans”, “2nd lien term loans” and amortizing loans or Term Loan As. US syndicated loans have a market value of $1.4 trillion, which is about 12% larger than the US HY bond market.

Last but not least are Leveraged loans originated and issued directly to a corporation from non-bank institutions. This includes business development corporations, interval funds, or private equity like lending platforms. These loans are typically referred to as “private debt” or “direct lending.” The direct lending market is estimated to be around 900mm in market value. Granular data on this asset class is hard to find—and that’s by design. This is the opaque, illiquid part of the leveraged finance markets. Information is on a need-to-know basis. It’s essentially provided to investors when lenders they need to raise funds or want to sell assets. It’s reasonable to assume that private equity tapped the direct lending market to take on more debt than investment banks or regional banks would underwrite. Remember, banks are regulated in such a way that caps the amount of leverage they can underwrite. The same can’t be said for this 900bln market that has grown 7 fold since the financial crisis.

All in all – think of the US leverage finance market as a $3.5 trillion dollar coin with higher quality fixed rate bonds on one side and lower quality floating rate loans on the other.

As always, thanks for your time & have a great week.

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