Senior Loan Talking Points

Senior Loan Talking Points – November 4, 2021

Jeffrey Bakalar

Jeffrey Bakalar

Group Head and Chief Investment Officer, Leveraged Credit Group

Mohamed Basma

Mohamed Basma, CFA

Managing Director, Head of Senior Loans and Global CLOs

Tamara Wieging

Tamara Wieging

Vice President, Client Portfolio Manager

Weekly Notables

  • The S&P/LSTA Leveraged Loan Index (the “Index’) gained 0.08% for the seven-day period ended November 4, while the average Index bid price was virtually unchanged at 98.56.
  • Primary market activity remained healthy, as arrangers syndicated a fresh batch of  new-issue paper, most of which was tied to acquisition-related activities. Opportunistic transactions remained prevalent as well, resulting in a total weekly volume of roughly $10.7 billion. When observing the forward pipeline, net new supply continued to outpace expected repayments, albeit by a smaller gap relative to last week ($11.9 billion vs. $10.2 billion).
  • In the secondary market, trading activity was on the quieter side, while earnings news led to trading action in both directions. Perhaps most notably, the underperformance of CCCs witnessed in October carried over into the new month.
  • To no one’s surprise, CLO formation did not show any sings of abating, as managers issued eight new deals this week, bringing the YTD total to $151.9 billion. Likewise, retail loan funds continued to experience strong inflows. For the week ended November 3, retail funds in the Lipper FMI universe that report weekly posted inflows of $585 million, marking the 40th week of positive flows this year.
  • There was one default in the Index for the weekly period (GTT Communications). The company filed a Chapter 11 on October 31.
Average Bid: S&P/LSTA LLI
November 1, 2016 to November 4, 2021
Average Bid: S&P/LSTA LLI
Average 3-YR Call Secondary Spreads: S&P/LSTA LLI 1,2
October 1, 2016 to October 29, 2021
Average 3-YR Call Secondary Spreads: S&P/LSTA LLI 1,2
Lagging 12-Month Default Rate: S&P/LSTA LLI 3
November 1, 2016 to November 4, 2021
Lagging 12-Month Default Rate: S&P/LSTA LLI 3
Index Stats
Index Stats

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.

October

Senior loan performance marked another positive reading in October as the Index advanced by 0.27%, although the pace of gains trailed the prior month. This was due to the market value reading tilting into negative territory (-7 bps; the first time since July) in the latter part of the month, as the average Index bid price hit a 3-year high of 98.66 on October 9 before moving lower to 98.55 by end of the month. In terms of asset class performance, loans were ahead of more rate-sensitive products such as high yield and investment grade bonds but trailed equities.

Performance was more mixed among ratings cohorts with less risk-on posturing relative to the last two months. Single-Bs led all categories with a 0.33% return, while BBs returned 0.23%. CCCs, on the other hand, experienced some softness and were in the red for only the second time of the year at -0.26% but remain well ahead of higher-rated cohorts on a YTD basis.  By sector, returns were led by Nonferrous Metals/Minerals, Air Transport, and Utilities, while laggards included the likes of Radio & Television, Health Care, and Automotive.

October was another busy month for the loan market, as participants sorted through roughly $50 billion of new-issue supply. In line with the prevailing theme of 2021, M&A continued to underpin new loan formation, accounting for nearly 63% of total deal flow. YTD institutional loan issuance has already eclipsed the previous annual high-water mark of $502 billion set in 2017 with October’s addition pushing the YTD tally to $538 billion. Similarly, M&A activity has set a new annual record at $283 billion. On the demand side, CLO issuance continued at a robust clip, as managers printed $19.2 billion in new vehicles, bringing the YTD figure to a record $149.4 billion through October, and now 16% ahead of the previous annual record. Interest for loans was further buoyed by the retail loan segment reporting a $3.9 billion investment influx according to LCD; YTD levels are tracking close to $40 billion.

There was one default in the Index (GTT Communications Inc.) during October and only the fourth of the year. Nonetheless, the trailing-12-month default rate by principal amount continued to fall, reaching a near-record low of just 20 bps.

1910000

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 October 29, 2021.

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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