U.S. leveraged loan funds have seen sizable net redemptions this year as investors pare back exposure to credit risk and weigh the implications of limited transparency in private credit markets. Leveraged loan funds, which invest in bank loans to highly leveraged companies trading in public markets, are viewed by some market participants as a public proxy for risk appetite in credit markets where many borrowers are also active in private credit.
Data from LSEG Lipper show the sector recorded $3.4 billion in outflows in March, the largest monthly withdrawal in about a year, following $2.4 billion in outflows in February. The trend has drawn attention because the flow patterns may reflect broader investor unease with redemption dynamics in less liquid private credit vehicles.
"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, offering one rationale for the recent selling pressure in loan funds.
Private credit firms have recently faced an uptick in redemption requests as some investors question the composition and resilience of loan portfolios. Concerns are particularly acute regarding how borrowers in certain sectors, notably software, will respond to disruption from artificial intelligence, according to market commentary included in recent reporting.
Some analysts point out that leveraged loans may carry relatively higher exposure to vulnerable sectors such as software and business services when compared with the public bond market, though that exposure is still described as lower than in some private credit portfolios. Rosenkranz cautioned that until redemption pressure in private credit eases or investor confidence in the creditworthiness of leveraged loan borrowers improves, fund flows are unlikely to become consistently positive. "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," he said.
Rating agency analysis has also flagged potential stress in speculative-grade credit. S&P Global indicated last month that U.S. speculative-grade default rates could rise to 4.75% by the end of 2026 under a pessimistic scenario incorporating setbacks in AI investment and a prolonged conflict in the Middle East.
Among individual funds, several large senior loan exchange-traded products showed notable outflows in the most recent month. The State Street SPDR Blackstone Senior Loan ETF recorded $911 million in outflows, the Janus Henderson AAA CLO ETF saw $543 million withdraw, and the Invesco Senior Loan ETF logged $303 million of outflows.
Impacted sectors: Credit markets, private credit, leveraged loan investors, software and business services borrowers.