Senior Loan Talking Points - December 20, 2018

Jeffrey Bakalar

Jeffrey Bakalar

Group Head and Chief Investment Officer, Senior Loans

Dan Norman

Dan Norman

Group Head and Managing Director, Senior Loans

  • Despite (or perhaps because…?) the Fed lifting rates higher, financial markets around the globe continued to remain under intense pressure this week. The loan market once again moved in a similar direction, as the S&P/LSTA Leveraged Loan Index (the “Index”) returned -0.95%, and the average Index bid lost 103 bps.
  • Market conditions kept loan demand heavily subdued (even as the Fed followed through), with investors firmly shifting into risk-off mode. Flows out of mutual funds reversed last week’s pace, totaling $2.9 billion (Lipper FMI universe*). However, on the CLO front, two more vehicles priced, raising the annual issuance record a notch higher, to $126.2 billion.
  • Despite the recent dislocation, overall transactional liquidity appears to remain reasonably good.  Trading is orderly in most cases, including the occasional BWIC. Also, there have been a few OWICs emerging, an indication of bargain hunting.
  • To that point, we’d raise the question as to whether the market has been oversold.  The percentage of performing loans priced at par or higher fell to just 1% (roughly a seven-year low), from 36% during October,  and approximately 75% in the early part of 2018.
  • There were no defaults in the Index.
Chart 1
Chart 2
Chart 3
Index Stats
IM1213-46782-1219

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 December 14, 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.

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