Senior Loan Talking Points - December 13, 2018

Jeffrey Bakalar

Jeffrey Bakalar

Group Head and Chief Investment Officer, Senior Loans

Dan Norman

Dan Norman

Group Head and Managing Director, Senior Loans

  • A variety of factors weighed on returns, as the S&P/LSTA Leveraged Loan Index (the “Index”) returned -0.78% for the five business days ended Dec. 13, with a decrease in the average bid price of 87 bps (to 95.52).
  • Demand (unsurprisingly) continued to remain under pressure. Given the ongoing turbulence, flows out of the retail loan funds persisted once again, tallying up to $1.46 billion for the period ended Dec. 12 (Lipper FMI universe*). However, a more positive development was seen in the CLO front as issuance in the U.S. in 2018 topped $125 billion this week, officially eclipsing the all-time record of $124.1 billion set in 2014. We do expect a further push in CLO buying through the end of the year which, historically, has provided incremental support to loan prices. 
  • While arrangers rushed to push some last-minute deals across the finish line, primary issuance has been understandably subdued as of late. New issue volume in December stands at just $3.8 billion, on pace to be the lightest months since August 2011. In helping bring some balance to the technical landscape as the market heads into year-end, the visible forward calendar fell to $12.5 billion, from $13.8 billion last week.
  • There was one default in the Index this week (Catalina Marketing Corp.).
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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.

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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 December 7, 2018.

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.