Covenants in the Coal Mine (Last of Two Parts)

The onset of renewed market volatility last week reminded credit participants that exogenous events do impact prices and new issuance, though to differing degrees.

Broadly syndicated loan and high-yield bond markets both saw price declines in secondary trading. But new junk issuance slowed to a crawl after the Brexit vote, while loan activity continued uninterrupted.

This divergent behavior is unsurprising. High yield investors, knowing their assets are unsecured and set at a fixed interest rate, are more sensitive to both rate and recessionary expectations. This was certainly borne out by cash exiting from retail funds last week – around $1.6 billion, according to Lipper.

The loan market, featuring senior secured, floating rate instruments, tends to soldier on despite market hiccups, albeit at costs to spreads and structures. Because the impact of Brexit looks to be fairly limited in the US, at least in the short-run, loans have recovered more rapidly.