As the warnings were being issued, both investors and companies looking for funding left the market.
Mutual fund outflows in December alone hit $15.4 billion in December, according to Refinitiv. The firm’s LPC group surveyed market participants and found they expect issuance to be weak this year, with most looking for it to be in a range of $90 billion to $110 billion. That would be a massive drop-off from 2018, which saw $274 billion in issuance during the first half alone, according to LeveragedLoan.com.
The key risk point for the industry is securitization, or the bundling of the loans into offerings such as collateralized loan obligations.
Yellen mentioned that danger specifically, saying the CLO industry for leveraged loans looked a lot like the subprime mortgage offerings that led up to the financial crisis. Wall Street sells CLOs to investors looking for yield; during the crisis, the securities became so opaque that investors had a hard time deciphering what they even held. The issues over securitization helped spark a lack of confidence that led to liquidity drying up in financial markets.
Refinitiv said CLO issuance hit a record $128 billion last year, though December saw the market sink to a two-year low.
One final issue hitting the industry has been the Federal Reserve.
Higher interest rates make the products more attractive, but central bank officials in recent days have become more tepid about the pace of increases. The possibility that the Fed may enact any hikes this year is another problem for the industry, Refinitiv LPC said.
The firm said the appetite for issuance to Athenahealth and Dun & Bradstreet, which launched earlier this week, will provide signals for this year’s market.