Senior Loan Talking Points – October 3, 2024

The US loan market’s performance moved higher this week. For the seven-day period ended October 3, the Morningstar® LSTA® US Leveraged Loan Index (Index) returned 0.21%. The average Index bid price gained 5 bp, finishing the week at 96.73. 

September’s strong issuance carried over into the first few days of October, as total volume during that period was about $2.4 billion. Turning to the forward calendar, net of the anticipated $12.1 billion of repayments not associated with the forward pipeline, the amount of new supply projected to enter the market is about $5.3 billion, down from last week’s supply of $10.3 billion. 

Activity in the secondary market was muted this week. Looking at performance, lower-rated names continued to outperform higher-rated credits. For the week, Double-Bs, Single-Bs and CCCs returned 0.15%, 0.23% and 0.40%, respectively. 

There was a surge in CLO issuance, as CLO managers priced 15 new deals during the week. YTD volume is currently over $144 billion. According to Morningstar, loan retail funds recorded an inflow of $37 million for the week ended October 2. The funds experienced only three weekly inflows totaling $96 million over the last 10 weeks. 

There were no defaults in the Index during the week.

Risk assets performed well in September, despite all the noise around economic data, monetary policy, and geopolitical escalations. The loan market was steady, as the Index returned 0.71% this month. However, loans underperformed the other risk asset classes and treasuries, as investment grade, high yield bonds and the US 10-year treasury posted gains of 1.76% (Morningstar US Corporate Bond Index), 1.63% (Morningstar US High-Yield Bond TR USD) and 1.37% (S&P 10-year Treasury Index), respectively. 

The average Index bid price lost 4 bp, closing out the month at 96.71. Looking at ratings, there was a notable dispersion among rating cohorts. Bid prices moved higher for CCCs, but softened for BBs and Bs. In terms of returns, Double-Bs, Single-Bs and CCCs returned 0.48%, 0.70% and 2.15%, respectively. On a YTD basis, returns have been relatively uniform across ratings segments, although lower-rated categories continued to outperform given the stable macro backdrop. 

On the issuance side, volume increased compared to the previous months, driven by a significant pick-up in supply of LBOs, M&A and dividend recaps entering the market. Total institutional volume was roughly $69.4 billion this month (the highest monthly volume in 2024). Acquisitions and dividend recapitalizations were the main drivers of issuance in September, as $48 billion of total issuance were not tied to refinancing activity (highest reading since January 2022). For context, the average volume excluding opportunistic deals was about $18 billion in the last 12 months. Turning to repricing and refinancing activity, this month’s volume was behind 1H24 pace, totaling $50.5 billion and $21.5 billion, respectively. Despite the slowdown, opportunistic deals are still running at a record pace on a YTD basis. 

On the other hand, demand for loans moderated in September. CLO issuance decreased this month to $11.9 Billion across 25 deals, but YTD pace remains record breaking. YTD volume currently stands at $142 billion, up 69% from last year's issuance of $84 billion. On the other hand, retail loan funds saw some outflows, as investors withdrew $1.1 billion from funds, but have experienced net inflows of $3.1 billion for the YTD period. 

There was one default (Wheel Pros) in the Index during the month. The trailing 12-month default rate by principal amount slightly increased to 0.80%. We expect only a gradual increase in defaults over the medium term. However, the market has experienced some distressed exchanges and LMEs which continue to be very topical across a handful of acute credit situations.