Senior Loan Talking Points

Time to read: Minutes
Jeffrey Bakalar

Jeffrey Bakalar

Group Head and Chief Investment Officer, Leveraged Credit Group

Mohamed Basma

Mohamed Basma, CFA

Managing Director, Head of Leveraged Credit

Weekly Notables

  • Performance in the US loan market continued to firm alongside other risk assets, as markets reacted positively to the Fed’s expected 25bp rate hike. The Morningstar® LSTA ® US Leveraged Loan Index (Index) returned 0.44% for the seven-day period ended February 2. The average Index bid price increased by 24bp, closing out the week at 94.37.
  • In the leveraged loan primary market, issuers continued to launch refinancings and amend-and-extend deals this week, given the improving tone. In the forward calendar, net of the anticipated $9.1 billion of repayments not associated with the forward pipeline, the amount of new supply expected to enter the market is about $2.1 billion, versus net new supply of about $2.5 billion in the prior estimate.
  • Secondary loan market was quiet this week, but average trading levels continued to move higher on the back of stronger technicals. In terms of rating cohorts, Double-Bs, Single-Bs and CCCs returned 0.24%, 0.49% and 1.16%, respectively.
  • On the demand side, CLO managers priced eight new deals this week, pushing YTD levels to $7.88 billion. On the other hand, retail loan funds continued to experience outflows, as $348.8 million exited the market for the week ended January 25, as compared to $153.8 million in prior week.
  • There were no defaults in the Index during the week.
Average Bid
February 1, 2019 to February 2, 2023
Average Bid
Average 3-YR Call Secondary Spreads1,2
January 1, 2019 to January 31, 2022
Average 3-YR Call Secondary Spreads 1,2
Lagging 12 Month Default Rate3
February 1, 2019 to February 2, 2023
Lagging 12 Month Default Rate 3
Index Stats
Index Stats

Source:  Pitchbook Data, Inc./LCD, Morningstar ® LSTA ® Leveraged Loan Index. Additional footnotes and disclosures on back page. Past performance is no guarantee of future results.   Investors cannot invest directly in the Index. *The Index’s average nominal spread calculation includes the benefit of base rate floors (where applicable).

 

Monthly Recap: January 2023

The US loan market started off 2023 on a strong note, as the Index returned 2.73% in January (representing the best start to the year since 2009). The average Index bid price closed out the month at 94.23, representing an increase of 178 bp from December levels. Putting into context the new year rally, the Index did not register a daily negative return in January. Despite the outstanding performance, loans underperformed other asset classes, as Equities and High-Yield bonds were up 6.28% (S&P 500) and 3.93% (Morningstar US High-Yield Bond TR USD), respectively, with the latter reflective of tighter spreads and lower yields in January.

From a credit ratings perspective, CCCs outperformed Double-Bs for the first time in a year with a return of 3.09%, as compared to 2.11% for the Double-Bs. Meanwhile, Single-B loans outperformed the broad Index and other rating cohorts with a return of 3.11%, as investors begin to increase their risk appetite on hopes of a soft landing.

Turning to the primary market, new primary loan issuance experienced an uptick this month compared to the seasonally slow December. However, total volume remained largely muted at just $11 billion, with issuance being mainly driven by refinancings along with a few M&A and LBO deals. The size of the loan market, as represented by total Index outstandings, declined by $7.4 billion in January, to $1.41 trillion.   

On the demand front, CLO managers priced $6.5 billion of across 15 new vehicles in January, ahead of last year’s issuance of $4.9 billion for the comparable period. On the other hand, retail loan investors continued to exit the market but at a slower pace relative to prior months, as total outflows were $953 million in January (Morningstar Direct).

There were two defaults (Serta Simmons Bedding and Heritage Power) in the Index in January, as the trailing 12-month default rate by principal amount moved higher to 0.83% (from 0.72% in December).

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Unless otherwise noted, the source for all data in this report is Pitchbook Data, Inc/LCD.  Pitchbook Data/LCD does not make any representations or warranties as to the completeness, accuracy or sufficiency of the data in this report.

1. Assumes 3 Year Maturity. Three-year maturity assumption: (i) all loans pay off at par in 3 years, (ii) discount from par is amortized evenly over the 3 years as additional spread, and (iii) no other principal payments during the 3 years. Discounted spread is calculated based upon the current bid price, not on par. Please note that Index yield data is only available on a lagging basis, thus the data demonstrated is as of January 31, 2023.

2. Excludes facilities that are currently in default.

3. Issuer default rate is calculated as the number of defaults over the last twelve months divided by the number of issuers in the Index at the beginning of the twelve-month period. Principal default rate is calculated as the amount defaulted over the last twelve months divided by the amount outstanding at the beginning of the twelve-month period.

General Risks for Floating Rate Senior Loans: Floating rate senior loans involve certain risks.  Below investment grade assets carry a higher than normal risk that borrowers may default in the timely payment of principal and interest on their loans, which would likely cause the value of the investment to decrease.  Changes in short-term market interest rates will directly affect the yield on investments in floating rate senior loans.  If such rates fall,  the investment’s yield will also fall.  If interest rate spreads on loans decline in general, the yield on such loans will fall and the value of such loans may decrease.  When short-term market interest rates rise, because of the lag between changes in such short-term rates and the resetting of the floating rates on senior loans, the impact of rising rates will be delayed to the extent of such lag.  Because of the limited secondary market for floating rate senior loans, the ability to sell these loans in a timely fashion and/or at a favorable price may be limited.  An increase or decrease in the demand for loans may adversely affect the loans.

This commentary has been prepared by Voya Investment Management for informational purposes. Nothing contained herein should be construed as (i) an offer to sell or solicitation of an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Any opinions expressed herein reflect our judgment and are subject to change. Certain of the statements contained herein are statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) changes in laws and regulations and (4) changes in the policies of governments and/or regulatory authorities. The opinions, views and information expressed in this commentary regarding holdings are subject to change without notice. The information provided regarding holdings is not a recommendation to buy or sell any security. Fund holdings are fluid and are subject to daily change based on market conditions and other factors.  

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