Senior Loan Talking Points

Jeffrey Bakalar

Jeffrey Bakalar

Group Head and Chief Investment Officer, Senior Loans

Dan Norman

Dan Norman

Group Head and Senior Managing Director, Senior Loans

  • U.S. senior loans started November off on a more positive note after being in the red for most of October. The S&P/LSTA Leveraged Loan Index (“Index”) gained 0.07% for the five business days ended Nov 7. This week’s return was primarily a function of interest-carry, as the average Index bid price dropped by five basis points (“bps”), to 95.37.
  • New issue activity improved a little this week, including the reemergence of a handful of repricing transactions. M&A activity was also present with roughly $2 billion launched into syndication to support acquisitions.
  • As the holidays begin to near, the forward calendar continued to slim: net of expected repayments, the amount of new supply poised to enter the market was just $2.2 billion, down notably from last week’s $8.6 billion.
  • The secondary market had a steadier tone this week, though individual loans were subject to movements resulting from earnings announcements.
  • CLO arrangers stayed busy, with four more transactions issued this week. Retail loan funds experienced outflows of roughly $273 million (Lipper FMI universe*) for the five business days ended Nov. 6.
  • There were no defaults in the Index during the week.
Average Bid
Average Three Year Call Secondary Spreads
Lagging 12 Month Default Rate
Index Stats

*S&P/LCD estimate.

Source:  S&P/LCD, S&P/LSTA Leveraged Loan Index and S&P Global Market Intelligence. Additional footnotes and disclosures on back page. Past performance is no guarantee of future results. Investors cannot invest directly in the Index.

October

October was a challenging month for the U.S. loan market, as softer secondary trading along with a more volatile macro backdrop weighed down on returns. In turn,  the S&P/LSTA Index lost -0.45% for the month, virtually erasing September’s 47 basis points advance. Although returns have been solid through the year-to-date period, at 6.31%, 2019 has been a volatile year for the asset class: the trailing-12-month standard deviation of monthly returns rose to 1.34% in October, the highest reading since July 2012, and up from just 0.30% a year ago. Given the less favorable market conditions, secondary prices retreated during the month, as the weighted average Index bid fell to 95.42.

Moving into the technical equation, supply remained fairly consistent with September levels. A total of $28.9 billion of loans closed and allocated in October, just a notch above $28.2 billion in September, but well above the monthly average for the year of $23.4 billion. The par amount outstanding tracked by the S&P/LSTA Index expanded by just $2.5 billion in October after increasing by $5.7 billion in September. Overall, the growth of the asset class has slowed so far this year, with the Index expanding by an average of $3.7 billion per month, versus a net gain of roughly $15.9 billion per month in 2018.

Turning to investor demand, CLO issuance totaled $10.4 billion for the month, representing a six-month high. Year-to-date volume has crossed the $100 billion mark, but remains behind 2018’s record setting pace. Retail outflows picked up in October, as $3.7 was withdrawn from the Lipper FMI universe of loan mutual funds. The net effect of the two measurable sources of investor demand remained positive for October, at $6.8 billion.

The continued “flight to quality” theme was evident in October with BBs outperforming riskier credits once again. At -0.02%, BB-rated issuers fared the best for the month, while Single Bs and CCCs lost -1.05% and -1.34%, respectively. Additionally, the gap between the average bid of BB and B– loans continued to widen, with the average bid of issuers rated B– by S&P declining by 156 bps in October, to 94.08, which was 34 bps lower than at the end of 2018. BB-rated paper, on the other hand, remained fairly well bid at 98.91.

Default activity picked up in October with four Index constituents defaulting for the month. As a result, the default rate of the Index jumped to an eight-month high of 1.43%.

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Unless otherwise noted, the source for all data in this report is Standard & Poor’s/LCD. S&P/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 November 1, 2019.

2 – Excludes facilities that are currently in default.

3 – Comprises all loans, including those not tracked in the LPC mark-to-market service. Vast majority are institutional tranches. 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.

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Past performance is no guarantee of future results.