Senior Loan Talking Points - February 7, 2019

Jeffrey Bakalar

Jeffrey Bakalar

Group Head and Chief Investment Officer, Senior Loans

Dan Norman

Dan Norman

Group Head and Managing Director, Senior Loans

  • For the seven day period ended Feb. 7, the S&P/LSTA Leveraged Loan Index (the “Index”) returned 0.31%, while the average bid added 21 bps, closing out at 96.10.
  • The new issue pipeline remained sufficiently active, with a few larger, attractively priced deals allocating and breaking relatively well into secondary trading. Looking forward, the announced net new pipeline increased slightly, to $13.4 billion, from $12.2 billion. Banker chatter does, however, point to an overall light calendar once live deals work through the system, traditionally a bullish signal for secondary prices.
  • Speaking of the secondary market, earnings are coming in, with a few notable positives, prompting significant bid increases. Price action was understandably less pronounced than what took place in high yield, as inflows in that area were significant, prompting an uptick in new issuance at increasingly tight spreads.
  • From a demand standpoint, one CLO was priced this week, pushing the YTD figure to $5.85 billion. Loan mutual funds marked their twelfth consecutive week of outflows with a $525 million withdrawal during the five business days ended Feb. 6 (Lipper FMI universe*). 
  • There were no defaults in the Index.
Average Bid
Average Three Year Call Secondary Spreads
Lagging 12 Month Default Rate
Index Stats

January

After an unusually volatile finish to 2018, January opened the new calendar year in much healthier fashion, as the Index advanced 2.55% during the period, representing the highest monthly return since March 2016. Buoyed by improved technical conditions (predominantly the significant reduction in mutual fund/ETF redemption activity), the average Index bid surged 205 bps, to close out the month at 95.89.

As secondary trading levels looked to find some solid footing, the primary market began the year on a quieter tone, before gaining traction as the new month wore on. Total institutional loan volume amounted to $31.1 billion for the entire month, slightly behind last January’s $36.8 billion; by all accounts, a healthy figure considering the high level of price discovery occurring at the beginning of the year. Roughly 87% of new issuance consisted of M&A-related transactions. Furthermore, M&A financing had the second busiest January on record for the asset class, behind only $37.4 billion in 2017. With $20.2 billion more added to the par amount tracked by the S&P/LSTA Index, the loan market has now seen a supply surplus in eight of the last nine months.  Reading the forward calendar “tea leaves”, we would expect that dynamic to lessen as we roll through the rest of Q1. 

Turning to investor demand, January was understandably muted given the circumstances in the fourth quarter. Starting with CLOs, managers printed $5.1 billion of new vehicles, well off-pace last year’s monthly average of $10.7 billion, but nearly on par with January 2018, when $6.3 billion of CLOs priced. On that note, retail investors continued to redeem, albeit to a much lesser degree, as an estimated $4.4 billion left the loan mutual fund space. Nonetheless, sentiment did improve, as net demand totaled $675 million, a notable upswing compared to the negative $12.2 billion withdrawn in December.

From a return by ratings perspective, higher rated credits fared better. BB-rated loans experienced the strongest recovery, returning 3.13% for the month. Single B loans and CCCs lagged behind with returns of 2.44% and 1.07%, respectively.

Fundamental credit risk continues to remain relatively stable across the market, with just one Index constituent defaulting during the month. The default rate of the Index closed out January at 1.42%, representing a 17-month low for the asset class.

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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 February 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.