Thursday, July 2, 2009

Mutual fund flows keep HY issuers alive. For now.

New HY debt issuance has hit levels that we saw back in 07 as the appetite for bonds returned (at least for now). Not so for loans. In fact some of the bond issuance has been used to refinance loans (see our post called Leveraged loans - a race against time)

The bond demand is coming from the usual suspects - mutual funds. Mutual funds have been keeping the credit markets open. Here is the recent history of mutual fund flows, both bond and equity funds. Note the pop in bond inflows (green line).

Mutual fund flows($MM); source: Investment Company Institute

Loan demand in the past mostly came from CLOs and other types of funds who ended up leveraged them. Most of that market is now gone. Yet there is a great deal to be refinanced as the maturities for loans are scheduled to accelerate, peaking in 2014 (see the latest chart from JPM below). By refinancing their loans now (with bond issuance), some firms have delayed the day of reckoning. Those who are unable to do so in the next 2-3 years will be facing default.

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