high yields of loans have gone from 10 percent & exceeded junk bonds since October

The gains in the iBoxx USD index leveraged loans include a 3.14 percent yield in this quarter, according to index administrator Markit Group Ltd. That compares with an increase of 1.92 percent from quarter to date Bank of America Merrill Lynch U.S. High Yield Master II index.

high yields of loans have gone from 10 percent for the year in the U.S., and exceeded junk bonds since October, as borrowers offer higher coupons on the bank's debt to generate demand amid a fall on new collateralized loan obligations.

The loan companies are offering more coupons for deals arranged for less than the debt is being included in so-called leveraged structured products, including CLOs, according to Jonathan Blau, head of global strategy for leveraged finance at Credit Suisse Group AG in New York. The high-yield bonds, which are used less in structured products, are more volatile and tend to have wider price swings in response to the crisis as concern for sovereign debt.

"Investors are taking advantage of the credit market are now using zero or very low leverage," said Blau. "Therefore, in order to comply with the obstacle of return that investors are demanding issuers have to offer much more widely to get deals done."

The overall performance of the year to date loan rate rose from 10 percent this week, closing at 10.47 percent yesterday, according to data from Markit. The indicator is composed of about 850 loans from 700 issuers. The total return performance index is 14.13 percent so far this year.

The past performance of loans between 1997 and 2007 have been about 5 percent, according to Otis Casey, a credit analyst at Markit in New York. High performance, high-risk debt is rated below Baa3 by Moody's Investors Service and BBB-by Standard & Poor's.

'Good Returns'

About a third of all loans have been refinanced since the beginning of 2009, according to data provided by Credit Suisse, which have an average new all-in coupon of 5.7 percent, 230 basis points above the all average coupon of the largest loans.

"We have a situation that is much easier in terms of generating a good return to investors without a lot of leverage," said Blau. "What has happened since Lehman and the crisis is that the money has flown into the loan market."

About $ 3.5 billion of CLOs backed widely syndicated loans have been issued this year from 02 December. About 91.1 billion U.S. dollars of ECO were organized in 2007 at the top of the market, according to Morgan Stanley.

CLOs are a type of collateralized debt obligation that the high-performance, high-risk loans and slice them into securities of varying risk and return.

Declining Market

A new edition busy schedule has not affected prices of loans this year because supply has not been able to keep the lending market continue to shrink. So far this year about $ 345 million in U.S. leveraged loans have been organized over $ 157 million in the same period last year.

The nominal volume of the Standard & Poor's / LSTA Loan Index fell to 504.8 billion U.S. dollars in November this year of 525.3 billion U.S. dollars in January, according to a report by the New York-based CreditSights Inc.

"The volume of new issuance has not put a damper on things, because ultimately, the flow of payments and has outstripped supply," said George K. Goudelias, senior portfolio manager at Seix Investment Advisors LLC, which has $ 11.5 billion in assets under management of leverage. "We expect supply and demand will be more balanced."

The rate increase

Leveraged loans are also about to get a boost as investors anticipate an increase in interest rates, according to a report by December 13 at Pacific Investment Management Co. earned Loans "well before" the last period of rising interest rates from 2004, the portfolio manager of Eve Tournier and the product of Michael Brownell, wrote in the report.

Investors are speculating that the London interbank offered three months, which banks charge to lend to one another, will rise more than 1 percent in mid-March 2012 from 0.30 percent today.

When the central bank tightened monetary policy for short-term rates tend to increase, helping to loans, which are variable rate products, said Blau.

"An increase in the front of the curve to help the loans," he said. "Everything that the negative effects produced due to a tightening of credit is overwhelmed because the rates are rising and you have more coupon."