CHICAGO--(BUSINESS WIRE)--Link to Fitch Ratings' Report: Loan Closed-End Fund Spotlight (Increased Interest in Loan Assets as Loan Credit Cycle Matures)
Increased demand from retail investors in leveraged loans due to more focus on interest rate risk is driving investment by U.S. closed-end funds (CEFs) in loan products, according to a Fitch Ratings report.
Since the first half of 2009, total assets for loan CEFs have increased by $23 billion and the overall number of funds has increased to 28 from 22.
The performance of leverage loans - both prices and default rates - has improved significantly since the financial crisis. This in turn has boosted CEF net asset values (NAV) and providing substantial asset coverage to rated CEF leverage. Since mid-2011, performance has been less volatile for the sector as secondary loan prices have settled at or above par given the favorable market trends.
However, risk appetite and leverage in the capital markets is increasing, with the current credit cycle resembling the time frame of 2005 to early 2006. While growth expectations for 2014 are more subdued compared to the last upswing, the first half of 2014 showed signs of credit expansion. Leverage among non-investment grade corporate issuers is also increasing. Fitch also notes that in the current low interest rate and low default rate environment, investors may regard the yield on loan products as a solid risk-adjusted return.
Fitch also notes that a larger number of funds have replaced term securities with variable-rate term preferred (VRTP) securities, a trend that Fitch expects will continue.
Fitch currently rates $3.8 billion of notes and preferred shares issued by ten loan CEFs. Fitch-rated loan CEF portfolios are fairly diverse in terms of both sector and issuer concentration.
The full report 'Loan Closed-End Fund Spotlight' is available at 'www.fitchratings.com.'
Additional information is available at 'www.fitchratings.com'.