Senior Loan Talking Points

Senior Loan Talking Points

Jeffrey Bakalar

Jeffrey Bakalar

Group Head and Chief Investment Officer, Leveraged Credit Group

Mohamed Basma

Mohamed Basma, CFA

Managing Director, Head of Senior Loans and Global CLOs

Tamara Wieging

Tamara Wieging

Senior Vice President, Client Portfolio Manager

Weekly Notables

  • In an eventful week in which the Fed raised interest rates by 50 bps, the loan market was not immune to the continued selling pressure and negative sentiment that has plagued performance in other assets for virtually the entirety of the year. The S&P/LSTA Leveraged Loan Index (the “Index”) lost 43 bps for the seven-day period ended May 5, pushing the YTD return into the red (-0.24%), as the average Index bid price declined by 51 bps, to 97.08.
  • Last week’s slower pace of issuance trickled into this week, as arrangers launched just a handful of deals, largely tied to LBO-related transactions.  However, the forward calendar remains relatively strong, albeit modestly decreased from last week, as net new supply (net of anticipated repayments) now totals roughly $20.3 billion, as compared to $22.1 billion in the prior estimate.
  • Secondary trading levels were lower across the board given the softer tone, while earnings were in full effect with a fair amount of public filers reporting results this week.  On the allocations front, only a handful of deals broke for trading due to light issuance levels.
  • Investor interest for loans remained robust and well diversified across both channels of measurable demand. Retail loan funds received $558 million of inflows for the week ended May 4 (Lipper weekly reporters), and six new CLOs were issued, which brings YTD issuance to $45.7 billion.
  • There were no defaults in the Index during the week.
Average Bid: S&P/LSTA LLI
May 1, 2017 to May 5, 2022
Average Bid: S&P/LSTA LLI
Average 3-YR Call Secondary Spreads: S&P/LSTA LLI 1,2
April 1, 2017 to April 29, 2022
Average 3-YR Call Secondary Spreads: S&P/LSTA LLI 1,2
Lagging 12-Month Default Rate: S&P/LSTA LLI3
May 1, 2017 to May 5, 2022
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. *The Index’s average nominal spread calculation includes the benefit of LIBOR floors (where applicable).

 

The U.S. loan market continued to exhibit resilience amid ongoing broad market weakness, as the Index registered a gain of 22 bps in April. The asset class has fared considerably better than both bonds and equities, which have experienced sharp losses through the YTD period. Similar to last month, interest carry was the driver of returns with secondary levels softening during the last week of the month. Overall, the average Index bid price decreased by 12 bps to 97.48 and is 116 bps lower than at the start of the year.

Performance among rating cohorts continued to reflect a risk-off tone. BB-rated loans were on top of the leaderboard for a second consecutive month with a return of 0.42%. Single-Bs were slightly behind the Broad Index at 0.19% for the period, while CCCs lagged notably, at -0.50%, and have been in the negative territory for every month since January.

From a market technicals perspective, new-issue activity increased relative to the muted levels experienced in the last two months. In April, total issuance was $35.5 billion, more than doubling March’s tally of just $17.3 billion and well ahead of February’s $23.9 billion. Arrangers syndicated a healthy slate of M&A-related deals, which represented approximately 51% of all transaction volume.

M&A has been the primary catalyst of loan supply through the YTD period. In fact,  the $96.5 billion issued so far is the most of any comparable period since GFC, only trailing last year’s record pace of $103 billion. On the other side of the equation, measurable investor demand sustained its elevated pace, as evidenced by relatively robust volumes in both the CLO and retail loan fund space. New CLO formation increased to $13.6 billion in April and has now eclipsed $44.3 billion on a YTD basis.  Not to be outdone, retail loan funds saw $6.3 billion of inflows for the month according to LCD and are now tracking $28.2 billion for the year.

There were no defaults in the Index during the month, as the Index continues to be default-free in 2022. The trailing 12-month default rate by principal amount closed out the period at just 0.18%, near record lows for the asset class.

2190574

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 April 22, 2022.

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.

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