Investors Searching for Yield Pump Up Sales of Risky Company Debt

Sales of securities backed by bundles of risky corporate loans set a new monthly record in August, powered by improving corporate earnings and investor demand for relatively higher yields.

Issuance of new collateralized loan obligations, which buy up corporate loans with junk credit ratings and package them into securities, were more than $18.7 billion this month, as of Thursday, according to S&P Global Market Intelligence’s LCD. That is the highest monthly total in data going back to January 2011.

This month’s sales are a notable reversal from last year. Then, pandemic fears sent prices on riskier debt plummeting, halting new issuance of so-called CLOs. Broad-based support for markets from the Federal Reserve, which included cutting interest rates to near zero, injecting liquidity into markets and buying bonds, has since helped renew investor demand.

This year is now shaping up to be one of the best ever for CLOs. Based on collateral and cash balances, the size of the global market surpassed $1 trillion, according to JPMorgan. For the year as a whole, Bank of America analysts are projecting $140 billion in new U.S. CLOs sales and $220 billion in refinancings and resets, when a portfolio’s maturity is extended and it is repriced.

A strong recovery in corporate earnings is helping drive investor demand for CLOs, analysts said. During the second quarter, earnings before interest, taxes, depreciation and amortization, or Ebitda, rose 21% from the same period a year earlier for public companies in the S&P/LTSA leveraged-loan index.