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Fixed-Income Insights

video

Portfolio Manager Jeff Lapin talks about the current fundamentals of the bank loan market—and where he’s finding opportunities now. 

Transcript

Narrator: This is Lord Abbett's Portfolio Commentary.

Mike Weldon: This is Mike Weldon, Partner and Director of Marketing at Lord Abbett. Joining me today is Jeff Lapin, Portfolio Manager for bank loans. Jeff, a lot of activity in the loan market. The first question I have for you is, a lot of investors are concerned, they saw a big increase in flows into this market last year. Is that a concern for bank loan investors?

Jeff Lapin: I think initially it was, but lately we've seen moderating inflows and that's constituted itself in a couple of ways. First of all, retail inflows into mutual funds are lower than they have been. They're still positive, but instead of running at a billion and half a week like it was towards last summer, we’re down towards a couple hundred million, which is definitely manageable.

Secondly, CLO issuance this year has still been relatively strong, but recent regulatory changes have created some uncertainty and I expect that to slow some. And then third, there's a supply component to the market, obviously. And last year's supply, on a net basis, meaning actual net, new issuance, not just refinancing existing debt, had paled in comparison to the amount of the inflows. And you had a net negative balance there which caused prices to rise and structures to get a little more buoyant. This year, you are seeing a pickup in supply and, if anything, I think the market may have a bit of an oversupply right now, which has caused the market to get into a little bit better balance.

Mike Weldon: Now there are growing concerns in the loan market about underwriting standards and the feeling is that those underwriting standards are deteriorating. Can you talk about that?

Jeff Lapin: Well, certainly in an environment where you have significant demand and not enough supply, you're going to see movement both in price and yield, and in structures. And so we have definitely seen a weakening in structures. There are a significant number of covenant light loans in the marketplace, I think about almost two-thirds of issuance now is covenant light, and some of the other structures are getting looser, there's no denying it.

We look at a couple of things when we're evaluating loans and when we're trying to determine, you know, kind of where we are in the cycle. First off, covenant light is a concerning mechanism, but there are still protections in the credit documents that will prevent companies from taking certain actions that are credit negatives. It's not as much as we might like or as much as it has been in the past, but each loan is evaluated individually.

The second aspect is to look at structures in general; how much leverage are being put on companies, what are the coverage ratios, how easily they're meeting their interest and capital expenditure disbursements, and other features that go into the broader capital structure. And after a number of years where leverage was coming down and coverage was rising, we are seeing some small deterioration in the amount of leverage, which is ticking up a bit, and coverage, which is ticking down a bit. But we're still a far cry from the go-go years of 2006 and 2007 where you saw a significant number of deals above seven times total leverage and a lot of deals above ten times. Those are still very few and far between, but there are some signs that we’re watching to determine, you know, where we are in the cycle.

Mike Weldon: Okay, thanks very much, Jeff. This has been Lord Abbett's Portfolio Commentary. Thanks for watching.

Mike Weldon: This has been Lord Abbett's Portfolio Commentary. Thanks for watching.

Narrator: For more information on this topic, or to access other videos, audio files, articles or commentary, please explore Lordabbett.com.

A Note about Risk:
The value of investments in debt securities will fluctuate in response to market movements. When interest rates rise, the prices of debt securities are likely to decline, and when interest rates fall, the prices of debt securities tend to rise. Lower-rated investments may be subject to greater price volatility than higher-rated investments. Moreover, the specific collateral used to secure a loan may decline in value or become illiquid, which would adversely affect the loan's value. Leverage, including borrowing for investment purposes, may increase volatility by magnifying the effect of changes in the value of an investment. The use of leverage may cause investors to lose more money in adverse environments than would have been the case in the absence of leverage.

The source for retail inflows into mutual funds is Strategic Insight.

Glossary

Collateralized Loan Obligation (CLO) is a special purpose vehicle (SPV) with securitization payments in the form of different tranches. Financial institutions back this security with receivables from loans. Collateralized loan obligations are the same as collateralized mortgage obligations (CMOs) except for the assets securing the obligation. CLOs allow banks to reduce regulatory capital requirements by selling large portions of their commercial loan portfolios to international markets, reducing the risks associated with lending.

Covenant-Lite Loan is a type of loan whereby financing is given with limited restrictions on the debt-service capabilities of the borrower. The issuance of covenant-lite loans means that debt is being issued to borrowers with less restrictions on collateral, payment terms, and level of income.

Coverage Ratio is a measure of a company's ability to meet its financial obligations. In broad terms, the higher the coverage ratio, the better the ability of the enterprise to fulfill its obligations to its lenders. The trend of coverage ratios over time is also studied by analysts and investors to ascertain the change in a company's financial position. Common coverage ratios include the interest coverage ratio, debt service coverage ratio and the asset coverage ratio.

This broadcast serves as reference material for information purposes only; does not constitute an offer to acquire, solicitation for an offer to acquire, an offer to sell or solicitation for an offer to buy any securities, nor is intended to be relied upon as a forecast, research, or investment advice on any securities, and cannot be used for any of the foregoing.

The views and opinions expressed by the Lord Abbett speaker are those of the speaker as of the date of the broadcast, and do not necessarily represent the views of the firm as a whole. Any such views are subject to change at any time based upon market or other conditions and Lord Abbett disclaims any responsibility to update such views. Neither Lord Abbett nor the Lord Abbett speaker can be responsible for any direct or incidental loss incurred by applying any of the information offered.

The value of investments and any income from them is not guaranteed and may fall as well as rise, and an investor may not get back the amount originally invested. Please consult your investment professional for additional information concerning your specific situation.

This broadcast is the copyright © 2014 of Lord, Abbett & Co. LLC. All Rights Reserved. This recording may not be reproduced in whole or in part or any form without the permission of Lord Abbett. Lord Abbett mutual funds are distributed by Lord Abbett Distributor LLC.

FOR MORE INFORMATION ON ANY LORD ABBETT FUNDS, CONTACT YOUR INVESTMENT PROFESSIONAL OR LORD ABBETT DISTRIBUTOR LLC AT 888-522-2388, OR VISIT US AT LORDABBETT.COM FOR A PROSPECTUS WHICH CONTAINS IMPORTANT INFORMATION ABOUT A FUND'S INVESTMENT GOALS, SALES CHARGES, EXPENSES AND RISKS THAT AN INVESTOR SHOULD CONSIDER AND READ CAREFULLY BEFORE INVESTING.

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The Fund seeks to deliver a high level of current income by investing primarily in a variety of below investment grade loans.

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