Investors just pulled out a record $13 billion from the shaky leveraged loan market

Flickr/Andrew Malone

Investors are fleeing 'leveraged loans.'

• Money has been pouring out of corporate leveraged loan investment vehicles for a record six straight weeks, BAML says.
• The outflows are significant because leveraged loan bundles look like one of the shakiest investment vehicles right now.

The end of December saw the sixth straight week of outflows of investment from US corporate leveraged loan funds, setting a new record.

That's according to Bank of America Merrill Lynch, which said in a note on December 27 that a total of $12.78 billion exited leverage loan investment, or 13.2% of the weekly reported total for ETFs and assets under management. The total pile of leveraged loans outstanding globally is about $1.6 trillion.

Bank of America Merrill Lynch

Investors are fleeing leveraged loans.

The outflows are significant because leverage loan bundles look like one of the shakiest investment vehicles right now. Warnings about increasingly lax standards in the market have come from far and wide: Former Federal Reserve chair Janet Yellen has sounded the alarm, echoing warnings from the Federal Reserve, the Bank of England, the Reserve Bank of Australia.

Leveraged loans are given to troubled companies who can't get access to cheaper credit via a normal loan from a bank, or a bond. The "leverage" comes from private equity groups, who invest their own money in return for a chunk of equity.

The loans are then bundled and sold on private markets in the form of collateral loan obligations - bundles of debt that can be bought and sold like mortgages. The companies who issue them pay higher rates of interest than investment-grade or government bonds.

But the loans are high-risk. They are often taken by "zombie" companies that would otherwise go to the wall. Leveraged loan issuance has increased so dramatically in recent years that 16% of US companies and 12% of all companies worldwide are now zombies sustained by leverage loan debt, or similar, according to the Bank of International Settlements.

"Record-breaking outflows from US leveraged loan funds and ETFs continued for the third consecutive week this past week, reaching $3.35 billion in redemptions," the BAML team, led by analyst Hans Mikkelsen, wrote in the note. That followed a $3.16 billion outflow a week earlier and a $2.41 billion outflow the week before that, which were both record-highs at the time.

BAML did not respond to messages requesting further comment.

• Read more:

  The 'zombie' problem: Low interest rates and 'leveraged loans' sustain a vast number of lousy companies which should have gone to the wall years ago

  $1.6 trillion in risky corporate debt ballooned after the Trump administration reversed an Obama-era policy discouraging high leverage

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