Senior Loan Talking Points – February 4, 2021

Jeffrey Bakalar

Jeffrey Bakalar

Group Head and Chief Investment Officer, Senior Loans

Tamara Wieging

Tamara Wieging

Vice President, Client Portfolio Manager

  • Senior loan performance was steady across the course of the week, albeit off the pace from the strong returns set in January. For the seven-day period ended February 4, the S&P/LSTA Leveraged Loan Index (the “Index”) returned 0.05%, while the average Index bid price moved lower by 2 bps, to 97.43.
  • Activity in the primary market cooled a bit following last week’s flurry of new transactions. M&A-related paper dominated this week’s deal flow, accounting for 64% of all volume. Repricings remained active but slowed relative to last week.  Looking at the forward pipeline, factoring in the $10.9 billion of anticipated repayments not related to the new issue calendar, net new supply expected to come to market expanded to $13.7 billion this week.
  • Allocations remained the primary focus of secondary market participants, as a bevy of deals broke for trading. Additionally, earnings season was in full effect, as almost 30 loan issuers reported quarterly results over the weekly period.
  • Measurable investor demand continued to remain strong. According to the Lipper FMI universe of weekly reporters, loan mutual funds received $156 million of inflows for the five business days ended February 3. Seven new CLOs were issued this week, bringing YTD totals to just under $10 billion.
  • There was one default in the Index during the week (Belk Inc; retail sector).
Average Bid: S&P/LSTA LLI
Average Bid: S&P/LSTA LLI
Average 3-YR Call Secondary Spreads: S&P/LSTA LLI 1,2
Average 3-YR Call Secondary Spreads: S&P/LSTA LLI 1,2
Lagging 12-Month Default Rate: S&P/LSTA LLI3
Lagging 12-Month Default Rate: S&P/LSTA LLI3
Index Stats
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.

January

Boosted by robust investor demand, the loan market opened the new year on a strong note, as the Index gained 1.19% in January. Price action was bolstered by momentum in lower-rated credits, which have benefited from a clear risk-on bias and general hunt for yield. The average Index bid strengthened relative to last month, having advanced 117 bps to close out the period.

Drilling into cohort performance, the top gainers were CCC-rated credits, which returned 3.54% during the month. Higher-quality buckets trailed in January, as single-Bs and BBs posted advances of just 0.74% and 0.63%, respectively. Notable sector performers were leisure, air transport, clothing/textiles, and oil & gas, all of which were disproportionately impacted during last year’s COVID-induced market drawdown. From an asset class perspective, loans outperformed other risk assets in January. High-yield bonds returned 0.37% for the BAML HY Master, while equities and investment grade corporates lost 101 bps and 123 bps, respectively for the S&P 500 (including dividends) and BAML High-Grade Corp Index.

With roughly $49.3 billion launched into syndication, the new-issue pipeline was in high gear in January. Of the new volume, roughly $19.5 billion represented M&A activity.

As a sizable share of loans now trade above par, unsurprisingly, repricing activity sprung to levels not seen since last January. For context, about $71.4 billion was repriced during the month, as borrowers took advantage of the favorable conditions. On the demand front, strong interest in the asset class was seen in both the CLO and retail fund segments. Starting with CLOs, managers printed $8.2 billion of new vehicles, the most for any January since 2013. Underpinning the strong activity was a continued compression in CLO liabilities, which has provided a strong tailwind for securitization. Meanwhile, retail loan funds, which saw sizable redemptions for much of 2020, posted an influx of roughly $4.5 billion for the month, representing the strongest monthly inflow since March of 2017.

Default activity was non-existent in January, and the Index has been default-free since October. As a result, the trailing-12-month default rate by principal amount fell to 3.38%, down considerably from its six-year high of 4.17% in September.

 

 

 

 

 

20210205-1514124-4557908

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 January 29, 2021.

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. Voya Investment Management Co. LLC (“Voya”) is exempt from the requirement to hold an Australian financial services license under the Corporations Act 2001 (Cth) (“Act”) in respect of the financial services it provides in Australia. Voya is regulated by the SEC under US laws, which differ from Australian laws. This document or communication is being provided to you on the basis of your representation that you are a wholesale client (within the meaning of section 761G of the Act), and must not be provided to any other person without the written consent of Voya, which may be withheld in its absolute discretion.

Past performance is no guarantee of future results.