Credit Risk Hits Bank Loan Mutual Funds

With the problems in the subprime mortgage market affecting the broader credit markets, bank loan mutual funds, which typically offer stable returns, are suddenly suffering losses, and investors are yanking their money out, The Wall Street Journal reports. According to AMG Data Services, investors pulled $461 million from the funds in the week ended July 25. That’s a significant amount, given that the funds collectively have $42.8 billion in assets under management, according to Financial Research Corp.

Bank loans are loans that banks have given to corporations and then resold to institutional investors. Such loans are considered below investment grade but of better quality than junk bonds because the interest rates that corporations remain steady, and in the event of a default, they are scheduled to be paid ahead of bonds.

In the past month, bank loan funds are down 1.43%, according to Morningstar. One fund that has taken a heavy hit is the LMP Corporate Loan Fund; it has lost 8.8% of its value in the past month.

Making matters worse for bank loan funds is the fact that many corporations are now shying away from bank loans, just as banks brought a slew of new issues tied to corporate leveraged buyouts to the market.

“People put off deals,” said Paul Scanlon, lead manager of the Putnam Floating Rate Income Fund. “When supply exceeded demand, prices needed to decline.”

The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.