Noninvestment-grade companies are paying slightly higher interest rates and selling at below par to attract institutional investors in the loan market, according to a Bloomberg report on Tuesday. “About 20 percent of borrowers have had to offer higher interest rates or yields than initially proposed since the beginning of March, compared with fewer than 9 percent during the first two months of the year,” said Bloomberg, including six in the last week. The issuers included KKR investment TASC Inc. and hospitality industry tech provider TravelClick.

The loan market is undergoing something of a “self-correction,” analysts said, with investors getting more selective about leveraged deals. On a net basis, noninvestment-grade loan mutual funds have withdrawn capital from the market in the last three weeks, including $664 million last week, according to data from Lipper.

Using data from Standard & Poor’s Capital IQ Leveraged Commentary & Data, Bloomberg found that companies issuing new, first-lien leveraged loans paid an average yield of 4.07 percentage points above benchmark rates last month, up from 3.71 points in February.

In the individual deals cited, TravelClick upped the rate on a $385 million buyout loan to 4.5 percentage points above the London Interbank Offered Rate (LIBOR) after a previous spread of 3.75. The loan also sold at a higher discount. Government contractor TASC, meanwhile, cut the size of its first-lien refinancing loan by about 10 percent to clear the market. It also had to offer a second-lien loan at a higher discount.

While mutual funds are pulling money from the loan market, collateralized loan obligations will potentially continue to be big buyers of corporate junk-rate debt. The special-purpose vehicles are projected to raise about $90 billion in 2014, according to Wells Fargo.

Source: KKR Pays Up in Junk-Loan Market as Funds Suffer Outflows – Bloomberg