- Volatility and broad market risk-shedding took another bite at loan bids generally this week, shaving 34 bps from the S&P/LSTA Leveraged Loan Index (the ‘Index”). The average bid ended the week at 96.39.
- Not surprisingly, new issue activity remains naturally curtailed by current market conditions. Total primary volume was approximately $3.9 billion, largely comprised of LBO or M&A-related offerings. While up slightly this week at $13.7 billion, the visible forward pipeline remains slim relative to recent run rates.
- Also to no one’s surprise, new issue spreads on institutional tranches rated B+/B continue to jump, coming in this week at L+412, versus L+371 last week (recognizing the relatively small sample size). While liquidity can be had, overall trading levels in the secondary market continued to remain subdued, again a function of both expected carefulness and calendar.
- Demand has understandably downshifted some. Four new CLOs were priced this week (YTD issuance growing to just under $124 billion), while mutual fund investors continue to follow the risk-off trade as evidenced by a $1.0 billion outflow for the period ended Dec. 5 (*Lipper FMI universe).
- There were no defaults in the Index during the week.
Overall capital market weakness weighed a little more heavily on loan prices and returns in November. The Index, in turn, lost 0.90% for the period, printing the most challenging month in nearly three years (December 2015). As buyers across the spectrum (CLO, institutional and retail) generally paused to assess a more uncertain macro investment outlook, overall bid levels naturally followed suit. As a result, secondary prices experienced a fairly quick (for the loan market) reset, pushing the weighted average Index bid to its lowest level since October 2016 (96.78).
The technical landscape shifted during the last two months, a phenomenon which is rare, but indeed does have precedence in the loan space. Aggregate traceable demand – namely CLO issuance and retail fund flows – leveled off notably, resulting in a large monthly supply surplus. Still, amid the chop, CLO issuance specifically, carried on at a solid pace, totaling $13.1 billion for November. Drilling further into this segment, the current formation is ahead of this time last year ($123 billion vs. $108 billion), and is expected to eclipse the 2014 full year record.
On the other side of the technical ledger, new issuance activity – while still outpacing demand in the aggregate – came down quickly as the month wore on, a function of reduced demand pull with a dash of seasonality factored in. New loans prepared for syndication totaled under $22 billion for November, the lowest monthly reading in the last two years (excluding the summer slowdown in August). Indicative of a shift from a seller’s to a buyer’s market, 41% of new-issue loans saw their spreads set higher during syndication, diverging from the trend seen just a few months ago, where roughly 70% new deals included borrow-friendly concessions.
From a return by ratings perspective, single B loans were the only cohort to outperform the broad Index with a return of -0.83%. Double Bs matched the Index, while CCC-rated credits lagged behind with a total return of -1.61%, an unsurprising development given the recent shift in risk sentiment.
Although the Index saw two retail constituents default during the month, the default rate by amount outstanding fell to a 13-month low of 1.61%, as four issuers dropped off from the rolling 12-month calculation.
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 November 30, 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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