By Matt Tracy

(Reuters) – Leveraged loan deals are anticipated to recover after a market stabilization over the past week, although some investors remain cautious about junk-rated loans amid potential economic weakening.

Borrowers reduced their activity in leveraged loan deals last week following disappointing jobs data on August 1 and 2, which heightened expectations for aggressive interest rate cuts and triggered worries over lower-rated debt.

Only six leveraged loans totaling $3.3 billion were sold last week, significantly below the $10 billion weekly average this year, marking the worst week for issuance outside the first week of July, according to PitchBook LCD data.

One junk-rated deal occurred on Monday with JetBlue Airways’ (NASDAQ: JBLU) five-year term loan. JetBlue initially sought a $1.25 billion loan but cut it to $750 million while increasing its bond offering to $2 billion from $1.5 billion, as reported by Informa Global Markets. JetBlue did not respond to comment requests.

On Tuesday, at least two leveraged loan deals emerged, including a $160 million add-on to virtual dataroom Datasite’s cross-border term loan and a $253 million repricing of term loans for for-profit education operator Adtalem Global Education, according to PitchBook. Neither Datasite nor Adtalem responded to comment requests.

Lower interest rates are potentially beneficial for heavily indebted companies. Hans Mikkelsen, a credit strategist at TD Securities, noted that if the Fed enacts further cuts, it will provide significant relief for borrowers. However, he warns that investors may earn less going forward and the availability of financing in the leveraged loan market may decrease.

Last week saw leveraged loan funds record $3.1 billion in outflows, the largest since March 2020, according to JPMorgan. This includes a record outflow of $2.4 billion from exchange-traded funds.

The Morningstar LSTA US Leveraged Loan Index declined 0.55% on August 5, marking its worst daily performance since the collapse of Silicon Valley Bank in March 2023, although it has since recovered.

Marina Lukatsky, global head of credit research at Pitchbook, emphasized that recent volatility disrupted the primary loan market, causing some opportunistic transactions to be sidelined, including those by Focus Financial Partners (NASDAQ: FOCS), SeaWorld (NYSE: PRKS) Entertainment, and SBA Communications (NASDAQ: SBAC). These companies did not respond to requests for comment.

Looking forward, Jeremy Burton, portfolio manager for U.S. high yield and leveraged loans at PineBridge Investments, anticipates an upturn in primary issuance in both markets. He indicated that many repricings and refinancings were pulled or not launched, which could resurface soon.

Despite a gap between net loan supply and investor demand since the Fed’s rate hikes began in 2022, sustained demand for new loan deals is anticipated through the end of this year. Lukatsky estimates that investor demand exceeded net loan supply by at least $130 billion as of July 31.

However, as 2025 approaches, indications of economic downturn and significant Fed rate cuts could negatively impact leveraged borrowers’ refinancing or new loan endeavors. PineBridge’s Burton remarked that, moving forward, investors are likely to concentrate on the potential for economic slowdown.