This story came out on Bloomberg yesterday and I thot it was pretty interesting. Anecdotally, I can confirm that this is happening in Canada too, as I will reflect below.
Basically, they report that many HY issuing companies have redeemed their HY bonds at a premium, either at the predetermined call price or at an even higher make-whole price, to issue leverage loans (economically it makes sense to do so for them because Loans have rallied so much there is an arbitrage). That is the opposite of what we usually see where issuers issue HY bonds to "term out" and "pay down" Loans as the banks want to reduce their credit exposure. Well now they are doing the opposite, and lots of it. YTD they have done about U$20bln while they only did about $18.3bln the previous 6yrs! Why?
Pretty simple answer...the inflows have been so enormous into Lev Loan funds (~70% of AUM YTD) that Lev Loan funds are clamouring over each other to get those proceeds invested.
So the first thing to think about is...well if they are redeeming HY bonds, then the supply outstanding of HY bonds must be dropping...and demand is picking up while supply is dropping...higher prices?! And don't forget, individually, the bonds are being redeemed at premiums.
The second thing is that the supply of Lev Loans is picking up dramatically. And this has implications on a few levels: 1) Lending standards are dropping as per the Fed and the Office of the Comptroller of the Currency warning in letters sent to banks over the past few weeks and 2) more supply...lower prices?!
And as I mentioned, I can confirm that this is happening in C$ HY too. Here are a list of issuers where we have had bonds called at a premium only to see the issuer issue in the Term Loan B (Institutional Lev Loans) market as the covenants are no less restrictive than in HY bonds but the pricing has rallied so hard that it is cheaper to issue in the Loan market as the demand has been so high:
1. Air Canada
2. Livingston Int'l
3. Garda World
And I think we will see a few more...
So why would you buy into a market that is seeing unprecedented increasing supply vs one that is seeing decreasing supply, at least on a relative basis? I suppose some are still concerned about interest rates rising. Well read some earlier posts on which part of the yield curve is rising, and over what time frame. Also read about how Libor Floors work. Both are very important.