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

  • The U.S. loan market started the new month off on a strong note, as prices moved generally higher, most noticeably in the lower-rated segments of the market. Overall, the S&P/LSTA Leveraged Loan Index (the “Index”) returned 0.42% for the seven-day period ended September 10, and the average Index bid closed out the week at 93.68. YTD total return is now very close to the breakeven point.
  • The primary market sprung back to life following the late-August slowdown with 14 new deals launched this week, representing about $8.8 billion of  volume. Use of proceeds were mixed, but skewed towards dividend recapitalizations, which accounted for a little over a quarter of the total. The visible forward pipeline, however, remains weak, as repayments still outstrip expected supply, by about $16.3 billion this week.
  • Secondary trading continued to firm this week despite volatility in equity markets and outflows in high yield. A handful of issuers experienced notable price gains after posting positive news/earnings.
  • On the demand front, two CLOs priced, bringing YTD levels to roughly $49 billion. Outflows from loan mutual funds/ETFs totaled $417 million for the five business days ended September 9.
  • There was one default in the Index during the week (iQor; Services & Leasing sector).
Average Bid
Average Three Year Call Secondary Spreads
Lagging 12 Month Default Rate
Index Stats

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.

August

In August, macro conditions continued to stabilize, leading to another round of gains for broad financial markets, loans included. The Index returned 1.49% for the month, marking the fifth consecutive positive monthly reading for the asset class. As loan prices pushed higher in the secondary market, the weighted average Index bid price gained 121 basis points, closing out the month at 92.85, the highest since March 8th.

The continued momentum resulted in price advances across all ratings cohorts with CCCs being the top performer for the month. The highly volatile rating bucket returned an outsized 4.07% in August, while single-Bs and BBs returned 1.53% and 0.70%, respectively. Loans priced below 80 now represent just 6% of the Index’s performing loans, compared to the high-water mark of 57% during the peak of the market sell-off in March. From a sector perspective, performance was led by the sectors affected the most by the COVID-19 pandemic. Included in this list was airlines, home furnishings, leisure, retailers and anything travel-related, as these sectors experienced large sell-offs in March but have found stronger bid support as of late.

Institutional loan supply saw a welcomed uptick in August, as total volume amounted to $18.2 billion, up from July’s figure of $13.0 billion.

This was a positive and surprising development given that August is traditionally a slower period for the asset class. The bulk of the transactions was tied to merger and acquisition-related activities, while opportunistic financings also contributed to the tally. Despite the increased volume, primary market activity continues to remain well behind last year’s pace (down about 29% for the comparable period).

On the other side of the technical equation, loan demand was down from the previous month, as CLO origination slowed, although this was largely expected due to the typical late-summer lull. On a YTD basis, CLO issuance currently stands at roughly $46.1 billion. At the same time, the pace of redemptions from loan mutual funds/ETFs fell for a fifth consecutive month, with August’s total outflows equating to about $0.94 billion.

Default activity in August abated somewhat relative to the prior four months. As two new constituents defaulted during the month, the treailing-12-month default rate by amount outstanding climbed to 4.08%, up from July’s figure of 3.90%.

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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 September 4, 2020.

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.

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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Past performance is no guarantee of future results.