More speculative-grade U.S. loans are trading above par than atany time since May, exposing investors who are funneling recordamounts of cash into the debt to greater risks as rising pricesencourage borrowers to refinance at lower interest rates.

Spanish-language broadcaster Univision Communications Inc. andKKR & Co.-controlled First Data Corp. are among at least 30companies seeking to reduce rates on $31 billion of bank debt asmore than 80 percent of leveraged-loan prices exceed 100 cents onthe dollar, according to JPMorgan Chase & Co. That's up from 40percent at the beginning of October, according to a report from theNew York-based lender last week.

“Loans are trading well above their call prices because theinvestor community is reaching out for existing loans,” JonathanKitei, head of U.S. loan distribution at Barclays Plc in New York,said in a telephone interview. “You will see more loans gettingrepriced.”

Investors last year deposited about $63 billion into loan fundsthat invest in debt with rates that rise with benchmarks and havelimited restrictions on early repayment. Banks from Barclays Plc toJPMorgan and Citigroup Inc. expect loans to underperform comparedwith 2013 as the Federal Reserve begins to taper its bondpurchases, paving the way for an increase in rates that have beenkept near zero for the last five years.

“Whenever loans are trading above par, you introduce anadditional risk element, as there is limited call protection,”David Breazzano, president of DDJ Capital Management LLC, whichmanages more than $7 billion in high-yield assets, said in atelephone interview. “Value in loans has dissipated a bit in thelast couple of months.”

Companies reduced borrowing costs on $281 billion ofspeculative-grade loans last year, or almost 4 times more than2012, according to Standard & Poor's Capital IQ LeveragedCommentary and Data.

Chrysler Group LLC cut annual interest expense by as much as $72million, tapping investor demand to reduce interest rates on itsborrowings, according to data compiled by Bloomberg.

The automaker controlled by Italy's Fiat SpA, which was paying4.75 percentage points more than the London interbank offered rate(Libor), with a 1.25 percent minimum on the lending benchmark on a$2.93 billion loan, cut the rate on the debt twice last year.Chrysler reduced its interest on the debt to 2.75 percentage pointsmore than Libor, with a 0.75 percent floor.

Funds Flows

Investors have added $2.4 billion to loan mutual funds thisyear, according to Bank of America Corp. The funds have been ableto garner interest for the asset class, highlighting thefloating-rate debt's seniority in the capital structure and roomfor increased income with rising interest rates, as the debt ispegged to floating-rate benchmarks.

The average price on the floating-rate debt climbed to 98.67cents on the dollar on Jan. 17, the most since July 2007, accordingto the S&P/LSTA U.S. Leveraged Loan Index .

The average yield on leveraged loans issued by U.S. companieslast month was 5.1 percent, down from 6.4 percent at the same timein 2012, according to S&P LCD.

Leveraged loans and high-yield, high-risk bonds are rated belowBaa3 by Moody's Investors Service and lower than BBB- atS&P.

JPMorgan, the second-largest underwriter of the debt in 2013,forecasts 4.5 percent gains for loans this year, compared with 5.3percent in 2013.

Bank of America, the largest underwriter, expects returns toslow to 4 percent, while Barclays sees 3.5 percent to 4.5 percent.The debt has gained 0.4 percent this month, S&P/LSTA index datashow.

The last time, when so many loans were trading above par was inMay, according to Barclays. The price on the S&P/LSTA index,which climbed to 98.62 cents on the dollar on May 22, fell to a lowof 97.31 cents on July 5 before recovering.

The U.S. central bank is trimming its monthly asset purchases by$10 billion, the Federal Open Market Committee said Dec. 18. TheFed will probably reduce its bond buying in $10 billion incrementsover the next seven meetings before ending the program in December2014, according to economists surveyed by Bloomberg inDecember.

Investors have sought to shield themselves from rate reductionsby seeking call protection. Almost all of the new loans beingissued last year had such restrictions placed on borrowers fromreplacing or refinancing credit pacts, up from about 40 percentfour years ago, according to Barclays.

Call Protection 'Useless'

“Everybody is demanding call protection but it's almostuseless,” Alex Jackson, the head of the bank loan group at CutwaterAsset Management in Armonk, New York, said in a telephoneinterview. “It's only good for two quarters.”

First Data is seeking to reduce the rate on a $2.49 billion termloan, according to a person with knowledge of the transaction. Thecompany is looking to lower rates by as much as 0.75 percentagepoints, said the person, who asked not to be identified withoutauthorization to speak publicly.

Univision more than doubled the size of bank debt on which it'sseeking to lower rates to $3.37 billion from $1.5 billion itinitially proposed, while seeking to shave 0.5 percentage points ininterest cost, data compiled by Bloomberg show.

“You've got persistent inflow into mutual funds,” Cutwater'sJackson said. “If you don't have supply of new issue, existingloans are bid up. You have to be worried about buying stuff andhaving it called.”

Elsewhere in credit markets, the cost of protecting corporatebonds from default in the U.S. rose. The Markit CDX North AmericanInvestment Grade Index, a credit-default swaps benchmark used tohedge against losses or to speculate on creditworthiness, climbed0.8 basis point to a mid-price of 66.15 basis points at 11:05 a.m.in New York, according to prices compiled by Bloomberg.

The Markit iTraxx Europe Index of 125 companies withinvestment-grade ratings increased 0.35 to 71.9.

The indexes typically rise as investor confidence deterioratesand fall as it improves. Credit swaps pay the buyer face value if aborrower fails to meet its obligations, less the value of thedefaulted debt. A basis point equals $1,000 annually on a contractprotecting $10 million of debt.

The U.S. two-year interest-rate swap spread, a measure ofdebt-market stress fell 0.25 basis point to 13.5 basis points. Thegauge typically widens when investors seek the perceived safety ofgovernment debt and narrows when they favor assets such ascorporate bonds.

Copyright 2018 Bloomberg. All rightsreserved. This material may not be published, broadcast, rewritten,or redistributed.