Floating Rate Issuance Rebounds Post-Holiday

by: , Managing Director and Portfolio Manager, Fixed Income Investors

Weekly Floating Rate Update

  • Financial markets remained mixed last week. U.S. markets continue to react to expectations over the regulatory agenda from the new Trump administration. Markets also responded to the strong rally in oil on Wednesday, after the surprise agreement reached by OPEC to reduce oil production. Equities were mixed, as the energy, banking, and health care sectors rallied, while the technology and biotechnology sectors underperformed. Generally, longer-duration fixed income has underperformed in recent weeks, especially U.S. Treasury Bonds, while floating rate and high yield have performed well. As we have communicated in prior weekly updates, we continue to expect heightened volatility as fundamental and technical market forces play out for the remainder of 2016 and as we head into the first quarter of 2017 (Standard & Poor’s LCD Weekly Wrap, 12/01/16, and J.P. Morgan Credit Strategy Weekly Update, 12/02/16).
  • The calendar for floating rate loan issuance bounced back after the anticipated slowdown over the Thanksgiving holiday. Last week, the floating rate loan market witnessed the launch of 31 deals for $13.4 billion, versus three deals for $1.4 billion in the prior week. The weekly average for issuance in 2016 has been $8.7 billion. YTD 2016, the loan market has witnessed $416 billion in issuance, eclipsing the $316 billion in the same period of 2015. We expect that issuance will begin to slow as we head into the end of FY 2016, and to maintain the trend we have witnessed during much the year, with an erratic new issue calendar highlighted by smaller, less well-known issuers with occasional large, leveraged buyout (LBO) deals to round out the pipeline. Given the rise in loan market trading levels, we have seen an increase in loan repricing activity. However, we continue to view the current environment as one still favorable for fund managers to invest (Standard & Poor’s LCD Weekly Wrap, 12/01/16, and J.P. Morgan Credit Strategy Weekly Update, 12/02/16).
  • Floating rate mutual funds realized $339 million of inflows in the holiday shortened week ended November 30, 2016. This inflow compares to the near record $1.1 billion inflow reported in the prior week. This was the sixteenth consecutive weekly inflow recorded. YTD, mutual funds have realized $444 million in inflows, which compares favorably to the $21.7 billion in outflows reported in the same period of 2015. Floating rate mutual fund AUM has now increased back to $110 billion this year, but is down 28% from the $153 billion peak reported in 2013. We remain constructive on the floating rate asset class, with positive overall fundamentals from below-average default rates for the foreseeable future (excluding potential defaults from the energy and metals & mining sectors), attractive reinvestment yields, and expected future increases in short-term interest rates (J.P. Morgan Credit Strategy Weekly Update, 12/02/16).
  • The secondary trading levels for more liquid floating rate loans were positive last week, as the LCD Flow-Name Composite increased 0.07% to 99.15% of par, compared to the index increasing 0.32% in the prior week. The current level of the composite has fallen from the high end of the range recorded over the last 12 months, and is at the same level last recorded in June 2016. It should be noted that this composite does not include any energy sector-related exposure, which has shown higher price volatility than the broader floating rate market since the beginning of 2015. The current average prices for floating rate assets remain at levels we believe offer value to investors, as illustrated in the following chart: (Standard & Poor’s LCD Weekly Wrap, 12/01/16):

Average Institutional Flow-Name Loan Bid

floating-rate-issuance-rebounds-post-holiday-markets-120816-chart

Source: LCD, an offering of S&P Global Market Intelligence, 12/01/16.

  • The floating rate loan market gained ground last week as the S&P/LSTA Leveraged Loan Index increased 0.18% for the week ended December 1, 2016, which compares to the 0.21% gain reported in the prior week. Loan returns were mixed by credit quality, as BB, B, and CCC loans returned 0.13%, 0.19%, and 0.62%, respectively. YTD 2016 loan returns are now 8.90% and remain ahead of the 0.37% gain reported in the like period of 2015 (Standard & Poor’s LCD Weekly Wrap, 12/01/16).
  • Market performance across asset classes for the week ended November 30, 2016 was mixed. Credit outperformed, as high yield, floating rate, and investment grade were all positive, with the Merrill Lynch High Yield Index, the S&P/LSTA Leveraged Loan Index, and the ML High-grade Corp Index reporting 0.27%, 0.18%, and 0.16% returns, respectively. Treasurys and U.S. equities underperformed, as the 10-year U.S. Treasury Bond and the S&P 500 Index returned -0.04% and -0.21%, respectively (Standard & Poor’s LCD Weekly Wrap, 12/01/16).

The S&P/LSTA U.S. Leveraged Loan Index is designed to reflect the performance of the largest facilities in the leveraged loan market.

Standard & Poor’s Leveraged Commentary & Data (LCD) Flow-Name Composite is designed to reflect the prices of the most liquid loans in the market.

The BofA Merrill Lynch U.S. Corporate Master Index (the Merrill Lynch High-Grade Corp Index) includes publicly issued, fixed-rate, non-convertible investment-grade, U.S. dollar-denominated, SEC-registered corporate debt having at least one year to maturity and an outstanding par value of at least $250 million.

The BofA Merrill Lynch U.S. High Yield Master II Index (the Merrill Lynch High Yield Index) tracks the performance of below investment-grade, but not in default, U.S. dollar-denominated corporate bonds publicly issued in the U.S. domestic market, and includes issues with a credit rating of BBB or below, as rated by Moody’s and S&P.

The S&P 500® Index is a broad-based unmanaged index of 500 stocks, which is widely recognized as representative of the equity market in general.

A basis point is a unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly used for calculating changes in interest rates, equity indexes, and the yield of a fixed-income security.

Credit Ratings: AAA credit ratings apply to the underlying debt securities and are rated by an independent rating agency, such as Standard & Poor’s (S&P), Moody’s, and/or Fitch. S&P rates borrowers on a scale from AAA to D. AAA through BBB represent investment grade, while BB through D represent non-investment grade. Moody’s rates borrowers on a scale from Aaa through C. Aaa through Baa3 represent investment grade, while Ba1 through C represent non-investment grade. Fitch rates borrowers on a scale from AAA through D. AAA through BBB represent investment grade, while BB through D represent non-investment grade.

Treasury securities are backed by the full faith and credit of the United States government as to payment of principal and interest if held to maturity. Interest income on these securities is exempt from state and local taxes.

All mutual funds are subject to market risk and will fluctuate in value. Before considering an investment in a floating rate fund, you should understand that you could lose money.

Floating rate funds are generally considered to have speculative characteristics that involve default risk of principal and interest, collateral impairment, borrower industry concentration, and limited liquidity. Securities purchased by the Fund that are liquid at the time of purchase may subsequently become illiquid due to events relating to the issuer of the securities, market events, economic conditions, or investor perceptions. As a result, an investor could pay more than the market value when buying Fund shares or receive less than the market value when selling Fund shares.

The Fund may not be able to pay redemption proceeds within the allowable time period because of unusual market conditions, unusually high volume of redemptions, or other reasons. To meet redemption requests, the Fund may be forced to sell securities at an unfavorable time and/or under unfavorable conditions.

Liquidity risk may also refer to the risk that the Fund may not be able to pay redemption proceeds within the allowable time period because of unusual market conditions, unusually high volume of redemptions, or other reasons. To meet redemption requests, the Fund may be forced to sell securities at an unfavorable time and/or under unfavorable conditions.

Past performance is no guarantee for future results, which will vary.

The opinions expressed herein are subject to change without notice. This material is distributed for informational purposes only, and is not intended to constitute the giving of advice or the making of a recommendation. The investments or strategies presented are not appropriate for every investor and do not take into account the investment objectives or financial needs of particular investors. An investor should review with its financial advisors the terms and conditions and risks involved with specific products or services and consider this information in the context of its personal risk tolerance and investment goals.

For more information about MainStay Funds®, call 800-MAINSTAY (624-6782) for a prospectus or summary prospectus. Investors are asked to consider the investment objectives, risks, and charges and expenses of the investment carefully before investing. The prospectus or summary prospectus contains this and other information about the investment company. Please read the prospectus or summary prospectus carefully before investing.

Fixed Income Investors is a multi-product fixed-income investment manager and a division of New York Life Investments. MainStay Investments® is a registered service mark and name under which New York Life Investment Management LLC does business. MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. Securities distributed by NYLIFE Distributors LLC, 30 Hudson Street, Jersey City, New Jersey 07302.

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Arthur Torrey

Managing Director and Portfolio Manager, Fixed Income Investors

Mr. Torrey is a Portfolio Manager in the High-Yield Credit Group. He joined New York Life Investments in 2006 and is responsible for the management of non-investment grade assets including floating rate loans and high-yield bonds

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