Many companies before the credit crisis were leveraging up to between 7 times and or 8 times and sometimes even higher. Ryan said he has not seen ratios near that now typically. Even the Dell LBO was only leveraged up about 6 times. (Which didn't keep Carl Icahn from squawking about the deal.)
Another big change is a company's reasons for issuing this kind of debt. Prior to the credit crisis, much of the leveraged loan action came from M&A. In 2008, 56% of the loans were the result of LBOs; in 2009, it got as high as 74%.
So far in 2013 the percentage ascribed to M&A is only 18.3%, with the rest used for refinancing and repricing debt. In some cases, companies are taking advantage of low rates to refinance loans they had refinanced only a year ago. With interest rates likely to begin to rise once the
finally begins to cut back on asset purchases, Ryan says, at some point, the loan market will cool down too.
This summer, when Fed Chairman Benjamin Bernanke said the central bank might move to pull back, 10-year Treasury yields doubled to nearly 3% within the space of less than two months. But in September, the Fed -- concerned about a still fragile recovery -- said it would put off that move, sending yields down to about 2.6%.
Demand from investors could also be pushing up the volume in leveraged loans, because this kind of debt fluctuates with interest rates.
"The loan market as a variable interest rate market may be perceived as a good hedge for some investors with the Fed talking about tapering and the prospect that we may be entering an increasing interest rate environment," Ryan says.
John Cokinos, head of Leveraged Finance Capital Markets & Syndicate at
Bank of America Merrill Lynch
, points to three growth investment areas that have lead to strong demand for leveraged loans: retail loan funds, separately managed accounts for institutions and collateralized loan obligations.
Loan funds have seen inflows for more than 60 consecutive weeks, capped by 38 straight weeks of inflows exceeding $700 million, a streak that is still going strong. Retail inflows are $52.3 billion year-to-date. To put this in perspective, the prior record for retail loan inflows is just $17.9 billion, which was set in 2010. Last year, inflows totaled $12.1 billion.