As institutional lenders continue their search for higher-yielding assets, second-lien loan issuance in the U.S. has surged over the past few quarters, reaching $7.12 billion during the first three months of 2017, according to LCD. That’s the most since the fourth quarter of 2014 ($12.55 billion).
And despite the increased amount of second-lien loan paper available investors, supply is no match for market demand. New-issue yields on these riskier debt tranches have eroded, from more than 11% in the second quarter of 2016 – when investor cash had been flowing out of the loan market – to 9.58% in 1Q 2017 (it has since ticked up to 9.96%, as the U.S. market has cooled a bit lately).
As their name implies, second-lien loans reside further down a company’s capital structure than does more senior debt, meaning second-lien lenders are repaid after first-lien lenders are repaid. Because of the additional risk, second-lien loans are more richly priced than first-lien debt.
You can read more about how second-lien loans work, and the loan market in general, in LCD’s online Loan Primer.
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This story first appeared on www.lcdcomps.com, an offering of S&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.