Last checked at 
By Lynn Adler
NEW YORK, March 31 (Reuters) - Recession fears and sinkingoil prices in early 2016 overshadowed a return of investor riskappetite in the past six weeks, dragging U.S. syndicated lendingto the lowest quarterly volume in more than five years.
The US$312bn of loans issuance in the first quarter plunged37% from the fourth quarter, and 19% from the first quarter ayear ago, to the lowest since US$245bn in the third quarter of2010, according to Thomson Reuters LPC.
The U.S. economic outlook brightened as the quarterprogressed, and oil prices bounced from more than 12-year lowsin mid-February, pushing aside some barriers steering investorsaway from leveraged loans and other high-yield debt.
The deal pipeline remains contained, but could gather steamif the economy continues growing modestly, investors andstrategists agreed.
The quarter's issuance drop extended last year's 6% slide toabout US$2trn, which was driven by market volatility, swooningoil prices, regulatory constraints on higher-risk debt anduncertainty over Federal Reserve policy.
"You had a tale of two halves during the first quarter,"swinging about mid-way through from risk-off to risk-on, saidJonathan DeSimone, a managing director and portfolio manager atSankaty Advisors.
ECONOMY, EARNINGS, ENERGY
In the first half of the quarter, concerns that the U.S.would slip back into recession, while oil prices set fresh lowsand stoked default worries, kept retail investors yanking moneyfrom loan funds and Collateralized Loan Obligation (CLO) fundssidelined.
After withdrawing from loan funds for 32 straight weeks,retail investors turned into net buyers during the first threeweeks of March.
Formation of CLOs, the biggest buyers of leveraged loans,also picked up, though they are seen playing a lesser rolegenerally due to regulations requiring CLO managers hold 5% oftheir funds. This risk retention rule takes effect in December.
CLO issuance was about US$8bn in the first quarter, seenclimbing to US$10bn in the second quarter, according to LPC. Aconsiderable downsizing, though, is seen following the 20%issuance drop in 2015 to about US$99bn.
"When you look out into the second quarter, the wild card isgoing to be earnings," said DeSimone. "We don't have a hugecalendar, which is good for the market, as we also don't havestrong CLO formation or retail flow."
Much of the first quarter was dominated by credit issues inthe oil and gas, and metals and mining sectors, as well as theoutflows from retail funds and slow CLO creation, said ScottPage, portfolio manager at Eaton Vance.
Average bids on the 100 most widely held leveraged loansfell to 95.3 cents on the dollar in February from 96.6 atyear-end, before bargain seekers surfaced to lift the bid to97.2 as of March 30.
A year ago, the average bid was still higher, near 100.
"The technicals/flow story that was so negative for bankloans and the primary cause of bank loans trading lower, hasrelented," Page said. "As a result, you've seen the sellingpressure on the most liquid names come off, and as soon as thatpressure was taken off, they lifted in price pretty dramaticallyduring the first quarter."
DEMAND NOW OVERTAKING SUPPLY
Investment banks that got stuck with loans on their balancesheets last year have been less aggressive in structuring newdeal terms, tilting the balance more to a buyer's market than anissuer's market, Page said.
Higher yields are also enticing buyers back.
After peaking at 7.33% in February, the highest since June2012, increased demand helped tug average yields on first-lieninstitutional loans down to 6.50% in March.
Still, the average yield of 6.53% in the first three monthsof this year was higher than 6.14% in the second quarter and thehighest quarterly average since the second quarter of 2012.
"The dynamics have definitely shifted since the beginning ofthe year," with demand now outstripping supply, said JohnFraser, managing partner at 3i Debt Management US.
The quarter's lending drop was most pronounced amonginvestment grade issuers. At US$141bn, issuance fell 43% fromthe fourth quarter to the lowest since US$121bn in the firstquarter two years ago.
For leveraged loans, the US$112bn issued was a 29% drop fromthe prior quarter and the lowest since US$101bn in the fourthquarter of 2011.
"Whether this (market traction) can be sustained all dependson new-issue supply, the overall economic environment and ifpeople continue to feel comfortable taking sub-investment gradecredit risk," Fraser said. "Right now the economy is in decentshape and we see very, very little new-issue supply on thehorizon." (Reporting by Lynn Adler; Editing By Michelle Sierra, JonMethven)
