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 S&P/LSTA Leveraged Loan Index (the “Index’) maintained its steady run, returning 0.20% for the seven day period ended August 1; the average bid of the Index moved up eight basis points (“bps”) in this week’s reading, to 97.05.
  • New issue activity appears to be picking up pace, as arrangers syndicated roughly $12.8 billion into the primary market. M&A activity propelled July’s new-issue volume to the highest level since October, however, refinancing activity was the primary driver this week, accounting for 55% of the total volume. Despite August’s typically slower pace of issuance, the forward calendar expanded this week, with the amount of net new supply totaling about $28.6 billion, versus $19.1 billion in the prior estimate.
  • In the secondary market, earnings season was in full swing with nearly 75 loan issuers reporting quarterly results this week, while trading levels continued to firm.
  • CLO issuance was robust once again, as 11 transactions priced, bringing YTD issuance to $74.4 billion. Retail loan funds experienced $326 million of outflows (Lipper FMI universe*).
  • The Index did not experience any defaults 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.

July

After backpedaling somewhat last month, the U.S. loan market kicked into higher gear during July, as healthier market conditions led to improved secondary prices and an uptick in new issuance. The Index returned a strong 0.80% for the month, while the market-value component of return – which captures the increase or decrease in secondary prices – returned 0.29%. Overall, the year-to-date return for the asset class has gained 6.59%, the best performance for such a period since 2009.

The primary market experienced a welcomed increase in new institutional issuance with roughly $40 billion breaking into syndication during the month, and $28.1 billion of the entire tally representing mergers and acquisitions. The total universe of outstanding loans shrank in July by approximately $10 billion, meaning repayments exceeded the pace of new issuance. This was only the second month since January 2018 that the par amount outstanding in the Index did not expand. The brief pull-back is not surprising given the rate at which the asset class has expanded during the last few years ($1.19 trillion in total oustandings as of July 2019 vs. $882 in July 2016).

Turning to the other side of the technical equation, investor demand – namely CLO issuance and mutual fund flows – continued to behave in recurring fashion. CLO managers printed $9.3 billion in new vehicles for the month. The year-to-date tally, on the other hand, remains slightly behind the 2018 record-setting pace, at $74 billion through July 31, versus $78.8 billion at this point last year. At the same time, the retail flight from U.S. loan mutual funds continued with another $2.8 billion of withdrawals for July. For reference, this was down notably from last month’s figure of $4.5 billion; however, the outflow streak has now reached a record 37 weeks.

Performance amongst non-investment grade rating cohorts improved across the board. Single B-rated issuers experienced the largest advance with a return of 0.84% for the month, while BBs followed closely behind at 0.78%. CCCs and Defaulted Loans lagged behind higher-quality rating cohorts with returns of 0.53% and 0.44%, respectively.

With no Index constituents defaulting in July, the default rate by amount outstanding moved down 2 bps, ending the month at 1.32%. Default activity is expected to remain fairly benign throughout the balance of the year and into 2020.

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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 July 31, 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.