Glenn Reynolds: Bond buyers turning to loans

By Neil Shah

NEW YORK (Reuters) - Corporate bond investors are increasingly turning to leveraged loans to reduce their risks and get more yield in an environment of tight spreads, Glenn Reynolds, chief executive and co-founder of research firm CreditSights, said on Monday.

"More and more institutional investors think, Maybe I should be in the loan business," Reynolds said at the Reuters Investment Outlook Summit in New York. "Maybe I have higher recovery rates and less downside by moving down the credit spectrum than being at the top of the capital structure."

The leveraged loan market has become a hot spot within U.S. credit markets recently, with issuance driven partly by a boom in debt-financed buyouts of companies.

One reason loans are attractive is that loan holders are paid off before unsecured bond investors in the event of an issuer's bankruptcy.

Debt investors are also jumping into leveraged loans to get extra yield given recent tightening of spreads in the junk bond market.

"It's causing a lot of people to go back to their asset allocation schemes," Reynolds said.

Meanwhile, high-grade corporate bond investors are losing much of their clout, he said. "Being an investment-grade bondholder in this environment is very difficult."

Reynolds also said that deterioration in subprime mortgages, or loans made to people with patchy credit histories, is not at the top of his list of worries.

"China I think is much more important than subprime," he said. Subprime "doesn't qualify as a systemic meltdown."

(For other news from the Reuters Investment Outlook Summit, click here)