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As part of an effort to attract more mutual funds, pension funds and insurance companies, the leveraged loan market has to add call protection to more deals.
But market participants say this protection won't be easy.
"Duration risk keeps real money, such as pension funds, away from the loan market, and adding [call protection] would allow the asset class to matriculate to the big leagues," said a New York bank loan trader who declined to be named. "The problem is that the callability is what makes the asset class attractive to issuers. From an issuer's point of view, it's a trade-off for dealing with covenants. Otherwise, treasurers would just term out in bond land."
A report authored last week by Chris Taggert, a senior leveraged finance strategist at CreditSights noted, "The factors associated with loan duration risk present cash yield management challenges for [mutual funds, pension funds and insurance companies] and result in reduced preference for the loan asset class. Given the size of high-yield bond mutual fund, pension fund and insurance company portfolios, a slight increase in exposure to the loan asset class would result in relatively sizable capital inflows."
Since 2008, the size of the loan market's investor base has decreased significantly. During this time, the volume of the Standard & Poor's/Loan Syndications and Trading Association leveraged loan index has contracted by 15%, according to Taggert. Meanwhile, volumes of high-yield bond indexes, he said, have gone the other way. And that trend "is...