Senior Loan Talking Points - August 2, 2018

Jeffrey Bakalar

Jeffrey Bakalar

Group Head and Chief Investment Officer, Senior Loans

Dan Norman

Dan Norman

Group Head and Managing Director, Senior Loans

  • Solid asset class performance continued this week as the S&P/LSTA Leveraged Loan Index (the “Index”) returned 0.13%.  The average Index bid increased three basis points (bps), to 98.39.
  • Approximately $13.5 billion of supply launched into the primary this week, with $10.9 billion specifically tied to financing buyouts and acquisitions. Belying August’s typically slower pace of issuance, the forward calendar continued to expand this week, with the amount of net new supply (net of all anticipated repayments) totaling about $26.9 billion, up from last week’s net new supply of $21.7 billion.
  • In the secondary market, earnings news make headlines for a few issuers. However, overall trading levels were largely unaffected as the average bid of LCD’s flow name composite was basically unmoved at 99.65% of par.
  • For the five business days ended August 1, retail loan fund inflows totaled $385 million (Lipper FMI universe*). CLO issuance remained healthy with three new transactions pricing, bringing YTD issuance to $78.4 billion.
  • There were no defaults in the Index during the week. The default rate by amounts outstanding was unchanged at 1.97%.
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*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.

July

The U.S. loan market gained 0.74% for the month of July, representing the second strongest monthly return of 2018 to date, behind only the 0.96% return in January. Stronger trading in the secondary market along with a moderation in new issue volume supported July’s improved performance from June’s relatively flattish return of 0.12%. As a result, the market-value component advanced 27 bps for the month, while the the weighted average bid of the Index rose by 34 bps in July, to 98.39.

In contrast to last month’s primary activity, institutional loan issuance leveled off with July being the third-lightest month for issuance this year, at $37.6 billion. M&A-related activity, which typically provides net new supply to investors, slipped to $28.1 billion in July, slightly trailing the $30 billion in volume posted the previous two month. Despite the new-issue slowdown in July, the loan market ended the month with a supply surplus. Total outstanding (at par) tracked by the S&P/LSTA Loan Index grew by $16.1 billion, bringing the total size of the Index to $1.06 trillion, yet another record for the asset class.

On the other side of the ledger, visible demand – namely CLO issuance and retail fund inflows – leveled off as well. CLO managers priced $9.7 billion of new vehicles in July, marking the first time volume fell below $10 billion since January of this year. For 2018, CLO issuance has averaged roughly $11.3 billion per each month. Reported retail loan funds were positive again, with an $867 million investment influx into the Lipper FMI universe of funds for the month of July.

Across the below-investment grade credit spectrum, loans enjoyed positive returns for the month. Unsurprising given the low level of volatility, CCCs led the way with a return of 1.31%, while Single B and BB-rated loans returned 0.72% and 0.74%, respectively.

There were no new defaults in the Index during July. Consequently, the lagging 12-month loan default rate was relatively unchanged, at 1.97%.

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 July 27, 2018.

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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Past performance is no guarantee of future results.