“Investors Turn Sour on Risky Deal Debt.

So read a front page WSJ headline this past Monday. The thesis of the article was that slowing investor appetite was hurting “the corporate buyout boom.” Three transactions were cited as evidence of this trend – one in the pharmaceutical sector, a specialty chemicals company, and a barge transportation business.

What the article failed to mention is that the tone of the leveraged loan market is not driven by investor appetite for a few issuers, or even specific sectors. Buyer behavior in the broadly syndicated market is reflective of three factors: fund flows, loan repayments and CLO formation.

First, on fund flows. As we’ve covered extensively in this space, fears of a sluggish global economy and the prospect of long-term near-zero interest rates have pushed investors out of loan funds and (until the last five weeks) out of high yield funds.

The net result of this investor flight is that $10 billion has been removed from the leveraged loan system year-to-date. Since retail funds historically represent about 20% of the overall demand for loans, that’s a meaningful drain on the cash supply needed to keep private equity sponsors engaging in buyout activity.