Canadian exchange-traded funds that buy leveraged-loans are shoring up defences against an abrupt flight by investors.
The Horizons Senior Loan ETF received approval from the Ontario Securities Commission to enhance borrowing limits to help meet potential redemptions in an asset class where it will take as long as 20 days to shut a trade. First Trust Advisors, which manages the largest loan ETF in Canada, is seeking similar permission from authorities, according to Bill Housey, who manages that fund.
\”We put this in place due to the potential timing issues around settlement of senior loans,\” Steven Hawkins, co-chief executive officer of the Horizon ETF, said inside a telephone interview. \”The manual process of signatures, couriers and faxing is simply mind-boggling. It\’s an unfortunate fact of the current market.\”
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The fund is now allowed to borrow as much as 10 per cent in accordance with its assets compared with a previous limit of five per cent, based on Hawkins.
The fund initially asked the regulator to permit it to borrow as much as 30 percent of its assets, much like standards in the U.S. The Horizons loan ETF includes a market capitalization of $44 million.
Regulators are increasingly paying attention to funds that buy hard-to-sell assets, Securities and Exchange Commissioner Kara Stein said in a speech in Washington on Monday. And they should question whether retail investors can comprehend the risks of purchasing funds that hold assets such as leveraged- loans.
Loan-settlement times lag behind other investments because the industry is constantly on the rely on faxes for some of its business.
\”Solely due to the settlement cycle, we might need to borrow funds to facilitate redemptions,\” said Hawkins.
First Trust\’s Canadian loan ETF has a market capitalization of $100 million and it has a similar $293 million fund within the U.S.
The firm increased its credit line for its U.S. funds to $80 million after last year from $20 million in 2013. The line can finance redemptions in a number of its U.S. funds, including the loan ETF, Housey said.
Loan funds have reported the largest outflows this year among fixed-income asset classes tracked by Bank of the usa Corp. Investors pulled $6.9 billion from the floating-rate debt, or 4.9 per cent of total assets, based on a June 11 report, in the Charlotte, North Carolina-based bank.
Invesco Ltd.\’s PowerShares Senior Loan fund, the largest ETF purchasing speculative-grade corporate loans, has seen its market capitalization shrink by more than 22 percent in the last year to $5.6 billion, based on data published by Bloomberg.
Jeaneen Terrio, a spokeswoman for Invesco, declined to comment when asked when the firm is taking any steps to protect against redemptions for the same fund in Canada.
\”It\’s a sensible thing to do,\” Housey said. \”You want to put in place as many levers as possible to pull in a challenging environment.\”