By Patturaja Murugaboopathy
April 10 (Reuters) - U.S. leveraged loan funds are suffering heavy outflows this year as investors grow more cautious about credit risk while broader concerns mount over redemption pressures and limited transparency in private credit markets.
The loan funds typically bet on bank loans to highly-leveraged companies that are traded in public markets. Since many of the underlying borrowers are active in private credit, the fund flows are a useful barometer of investor appetite
for credit risk.
According to LSEG Lipper data, U.S. leveraged loan funds saw outflows of $3.4 billion in March, the largest in about a year, following outflows of $2.4 billion in the previous month.
"Investors who are concerned about these same factors in the private credit space but cannot secure full redemptions there may use the loan market as an ATM," said Jeffrey Rosenkranz, a portfolio manager at Shelton Capital Management.
Private credit firms have recently faced rising redemption requests as investors question the health of loan portfolios and how borrowers, particularly in the software sector, will navigate disruption from artificial intelligence.
Some analysts said the leveraged loan market has greater exposure to vulnerable sectors such as software and business services than public bond market, though less than some private credit portfolios.
"Until pressure in private credit eases or is offset by stronger confidence in the underlying creditworthiness of leveraged loan borrowers, fund flows are unlikely to turn consistently positive," Rosenkranz said.
S&P Global said last month that U.S. speculative-grade default rates could rise to 4.75% by the end of 2026 under a pessimistic scenario that includes setbacks in AI investment and a prolonged conflict in the Middle East.
Among individual funds, the State Street SPDR Blackstone Senior Loan ETF saw outflows of $911 million in the past month, while the Janus Henderson AAA CLO ETF and Invesco Senior Loan ETF recorded outflows of $543 million and $303 million, respectively.
(Reporting By Patturaja Murugaboopathy in BengaluruEditing by Vidya Ranganathan and Christina Fincher)
