- The U.S. loan market, as represented by the S&P/LSTA Leveraged Loan Index (the “Index”) saw a modest advance of three bps for the week ended May 6, purely a function of interest-carry, as the market value component of return was slightly negative. At 97.77, the Index’s average bid price declined by four bps.
- New supply was muted this week relative to the pace set in April. Total levels came in at just $5.8 billion. By purpose, LBO and M&A-related transactions represented the bulk of this week’s paper. In the forward calendar, new supply coming to market (net of repayment activity) contracted to just $1.2 billion, as compared to $5.7 billion last week.
- Interest in floating rate products remained in high gear. On the CLO front, four new CLOs were issued during the week, bringing YTD levels to $53.4 billion. Meanwhile, retail loan funds posted another strong weekly inflow, to the tune of $899 million for the week ended May 5 according to Lipper.
- In the secondary market, earnings season was in full effect, leading to price movements in both directions. CCCs, on average, saw the most meaningful upward action during the week, as investors continue to have a strong hunt for yield.
- There were no defaults in the Index during the week. The Index’s default rate by principal amount is currently at 1.73%.
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.
Following a flat return in March, senior loans regained the pace set in the first two months of the year, as the Index returned 0.51% in April, bringing the YTD return for the asset class to 2.30%. A healthy technical backdrop, stronger secondary trading levels, and a continued relatively low-vol environment were all drivers of the positive advance. The Index’s average Index bid price increased to 97.79 relative to March levels, representing a rise of 24 bps. Loans trading at par or higher are now roughly 16% of the Index versus none at this point last year.
The continued outperformance of higher-yielding, lower-rated credits did not subside in April, as investors remained firmly in risk-on mode. CCCs were ahead of the pack with an advance of 1.30% and have now outperformed higher quality for the 12th consecutive month. Single-B and BB-rated paper posted total returns of 0.50% and 0.28%, respectively. Second-lien loans also outperformed first-liens (1.26% vs. 0.50%). By industry, top performers were Oil & Gas, Air Transport and Cosmetics/Toiletries, all of which were disproportionately impacted by last year’s market drawdown but have rallied following the macro recovery.
The loan market’s technical equation moved closer to equilibrium in April, as net supply increased during the month (LCD measures net supply as change in outstandings minus repayments), helping absorb the strong investor demand. Drilling into the supply side, loan arrangers syndicated roughly $52.7 billion of institutional loans. Loans backing LBO transactions totaled $19.8 billion in April, the most since September 2018. LBO-related supply is tracking the highest annual pace post-GFC and second most on record for the asset class. Loan demand continued at a strong clip, as evidenced by persistent CLO formation and retail inflows into the asset class. CLO managers printed roughly $12.8 billion of new vehicles in April, while loan funds saw net inflows of $5.7 billion for the month, the highest reading since April 2017.
The Index experienced another default-free month; as a result, the trailing-12-month default rate by principal amount fell by 55 bps, as a bevy of bankruptcies rolled off the calendar. Perhaps, surprising to many, the default rate now sits below the historical average of 2.9% for the asset class, having been elevated above for 11 months due to the deluge of COVID-induced defaults experienced last year.
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 30, 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.
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Past performance is no guarantee of future results.