Senior Loan Talking Points

Jeffrey Bakalar

Jeffrey Bakalar

Group Head and Chief Investment Officer, Senior Loans

Dan Norman

Dan Norman

Group Head and Senior Managing Director, Senior Loans

  • The U.S. loan market started the New Year where it left off in 2019, continuing the strong run that marked December of last year.  The S&P/LSTA Leveraged Loan Index (the “Index”) returned 0.40% for the seven day period ended Jan. 9; the average Index bid gained 31 basis points (“bps”), ending at 97.06.
  • The primary market opened January with a surprising flourish, although some of that was spillover from last year.  Total new-issue volume amounted to $5.9 billion, with about 80% tied to buyouts. Looking ahead, the amount of announced repayments still outstrip visible new supply by about $689 million.
  • Secondary trading continued to firm, as the percentage of loans quoted at par or higher now stands at roughly 57%, the highest level in 15 months. The upward price action was the most pronounced in CCC-rated loans, which lagged in 2019.
  • Loan mutual funds experienced $37 million of outflows for the five business days ended Jan. 9 (Lipper FMI universe*), by far the lightest weekly total during the current 63 week (save for one) outflow streak. On the CLO front, no new vehicles have been issued yet.
  • There was one default in the Index for the week (Constellis Holdings).
Average Bid
Average Three Year Call Secondary Spreads
Lagging 12 Month Default Rate
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.

December

Driven by improved secondary levels and the typical seasonal supply shortage, the U.S. loan market finished 2019 in strong fashion, as the S&P/LSTA Leveraged Loan Index (the “Index”) gained 1.60% in December, bringing the full-year return to 8.64%. This represented the highest reading since 2016’s return of 10.16% and a material rebound from 2018’s lackluster 0.44%. The average Index bid rose 114 bps in December, which was 288 bps higher compared to the start of the year.

The institutional loan market during December experienced a marked reduction in supply, leading to a modest (approximate 0.5%) contraction in Index outstandings. The lull in supply was unsurprising given the expected holiday slowdown, as just $7.9 billion was issued in the final month of the year, well below the $28.9 billion issued in November. Still, the overall growth of the loan market slowed in 2019, largely due to increased repayment activity, with the Index expanding by $4 billion on average per month, compared to $15.9 billion in 2018. Full-year institutional issuance, on the other hand, totaled approximately $309 billion with about half of that consisting of mergers and acquisition-related activities.

On the other side of the technical ledger, measurable investor demand – namely CLO issuance and retail fund flows – remained consistent, driven largely by CLO formation.

For the month, the CLO tally amounted to roughly $7.5 billion, which brought 2019’s total CLO issuance to a robust $117.9 billion (vs. 2018’s record $128.9 billion). Retail flows were out once again, albeit at a more measured pace. LCD estimated a net outflow of $1.54 billion from the retail loan funds, the smallest in 14 months.

From a ratings perspective, lower quality names outperformed their higher-rated counterparts during the month. While the loan market spent most of the year in risk-off mode, the last two months of the year signaled a shift of sorts in sentiment (in addition to the recognition that the most highly rated credits had become arguably fully valued on a relative basis), as CCCs and B-rated credits staged an impressive rally, narrowing the outperformance gap BBs built earlier in the year. CCCs led the rally with a return of 3.24%, followed by Single Bs, which returned 1.94%. Meanwhile, BB-rated loans returned just 0.88%.

Default activity remained low in December, as just one Index constituent defaulted. The loan market’s trailing 12-month default rate ended 2019 at 1.39%, which was down from 1.63% one year ago, and remains well below the long-term historical average of 2.90% 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 January 3, 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.

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.  

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