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 September off on a solid note as the S&P/LSTA Leveraged Loan Index (the “Index”) returned 0.10% for the seven day period ended Sep. 5. The average Index bid added three basis points (“bps”), to 96.32.
  • On the heels of the typical late-August slowdown, the institutional new-issue pipeline saw a notable uptick this week. Roughly $17.3 billion launched into syndication. Looking ahead, when netted against repayments, net new supply expected to debut in market totals about $20.0 billion, up from last week's reading of approximately $18.9 billion.
  • Secondary trading regained a better tone over the past week.  LCD’s flow-name composite moved up 10 bps, to 99.33%. Stressed activity, while certainly not absent, remained largely relegated to known sectoral and/or credit-specific issues.
  • On the CLO front, four new vehicles priced this week, which brings the YTD total to roughly $83.0 billion. Retail loan funds, on the other hand, experienced $375 million of outflows for the five business days ended Sep. 4 (Lipper FMI universe*).
  • The Index did not experience any defaults during the week.
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.

August

Exacerbated to some degree by seasonally-slower liquidity conditions, August was a relatively weak month for the U.S. loan market as investors struggled to shake off recession fears and escalating trade uncertainties. The S&P/LSTA Index lost -0.27% for the month (+80 bps in July), led lower by a 72 bps reduction in the average Index bid price. Contrasting the average monthly gain of 0.92% for the year, August’s performance marked the lowest reading since the Index fell    -2.54% during market turmoil in December. Despite the setback, the asset class continues to outperform prior years, returning 6.30% in 2019 through Aug 31, which has outpaced any year-to-date return of the past 10 years.

Somewhat paradoxically, the overall market value decline came during the second monthly supply shortage in a row, as new issue activity remained subdued. Typically, a supply shortfall is a technical tailwind; however, that didn’t exactly pan out in August as “high quality” (i.e., solid BB/better, which represents a relatively low percentage of paper available) remained, in most cases, very well bid, while all else was flat-to-lower (numbers attached in a moment). In the last two months, repayments exceeded new issuance by roughly $25 billion, the largest two-month mismatch in a while. This has led to a reduction in the size of the Index for a second consecutive month, to $1.17 trillion, from a record $1.20 trillion in June. 

On the other side of the technical ledger, investor demand continued to follow a trend that we have largely been accustomed to this year. CLO issuance remained active as managers priced roughly $7.3 billion worth of new vehicles (a good number for August although off the $9.8 billion monthly average set over the LTM period). Conversely, and unsurprisingly, the flight from loan mutual funds did not ease up in August, as another $3.9 billion came out, bringing the outflow streak to a record 41 weeks. We expect this to continue should rate expectations remain as dovish as they currently are.

Although secondary prices slipped almost across the board in August, a bigger chunk was taken out of riskier credits, as managers continue to bid up higher-rated assets. Double B-rated loans added nine basis points for the month, while single-Bs and CCCs lost -0.41% and -1.81%, respectively. As a result, the yield differential between B and BB continues to grow, arguing the former may in fact be undervalued and the latter may be overpriced (?). Against a backdrop that’s now awash with macro uncertainties, the same dynamic is playing out in both the IG and HY bond markets.

Default activity within the Index remained non-existent for a second consecutive month, slimming the default rate by amount outstanding by three basis points, to 1.29% in August.

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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 August 30, 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.