Senior Loan Talking Points - July 5, 2018

Jeffrey Bakalar

Jeffrey Bakalar

Group Head and Chief Investment Officer, Senior Loans

Dan Norman

Dan Norman

Group Head and Managing Director, Senior Loans

  • The S&P/LSTA Leveraged Loan Index (the “Index”) returned 0.13% for the week, while the average bid for the asset class advanced two basis points (bps).
  • Volume was down in the primary market this week as investors and arrangers enjoyed the holiday shortened week. As a result, the forward calendar experienced a natural slimming: net of all anticipated repayments, the amount of net new supply poised to hit the market totals about $2.2 billion, versus net new supply of $15.2 billion last week.
  • While secondary market activity slowed down, a handful of new deals broke to secondary late last week and early this week. The average bid of LCD’s flow-name loan composite moved up seven bps in this week’s reading, to 99.30% of par, from 99.23% last week.
  • CLO issuance was healthy this week, as seven transactions priced. YTD issuance stands at an impressive $70.2 billion. Retail loan funds in the Lipper FMI universe* received $48 million of inflows.
  • There were no defaults in the Index during the week. The default rate by amount outstanding currently stands at 1.95%.
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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.

June

June was a busy month for the loan market as a flood of new-issue loans entered the primary market, putting downward pressure on secondary prices. Consequently, the S&P/LSTA Loan Index (the “Index”) returned a modest 0.12% in June, while the market-value component retreated 33 bps.

The institutional market has seen a historic uptick in new acquisition-related supply in recent moths, with levels of activity soaring to record highs. June experienced $31.4 billion of fresh M&A-related paper, on the back $34.7 billion during May. Overall, the $84.2 billion of institutional M&A volume in the second quarter is the highest quarterly figure ever, according to LCD.

On the other side of the ledger, demand also expanded. CLO managers priced $13.7 billion of new vehicles in June, a four-month high, up from $11.7 billion in May and from the running 12-month average of $11.1 billion. U.S. retail loan funds experienced net inflows of approximately $2 billion.

Monthly performance among non-investment grade rating cohorts were a function of interest carry this month, with distinctions between ratings reflective of only the higher coupons of the riskier cohorts. BBs and Single Bs returned 0.03% and 0.16%, while CCCs returned 0.80% for June. The disparity in returns over year-to-date, however, is a bit wider, with CCC loans returning 4.70% over the six-month period, compared to single B and BB loans at 2.29% and 1.63%, respectively.

There was one default in the Index during the month (Westmoreland Coal; Metals & Mining sector). The default rate by amount outstanding moved down 17 bps, to 1.95% in June.

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 June 29, 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 twelvemonth 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.

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