Senior Loan Talking Points
Managing Director, Head of Leveraged Credit
Weekly Notables
Broader risk asset performance remained stable despite economic uncertainty that was magnified by the US government shutdown. The US loan market, as represented by the Morningstar LSTA US Leveraged Loan Index (Index), lost one basis point (bps) during the seven-day period ended October 2. Secondary prices moved lower, as the weighted average Index bid price fell by 11 bps to 97.00. The weaker performance was driven by the price decline of First Brands Group, which filed for Chapter 11 Bankruptcy earlier in the week, as well as some selling pressure from elevated newissue activity.
The primary market remained busy, as arrangers launched a bevy of new deals, including a handful of refinancings, dividend recaps and some acquisition-related paper. Looking ahead, the forward pipeline expanded this week, and while repayments continue to outstrip supply by roughly $2 billion, this is an improvement from last week in which repayments outstripped expected supply by $9.2 billion.
Across credit ratings, BBs and CCCs outperformed again, while Single-Bs continued to lag due to some idiosyncratic situations.
CLO managers priced six new deals this week, which pushed YTD issuance to $153 billion. Meanwhile, retail loan funds experienced an inflow of $131 million for the week ending October 2 according to Lipper.
Given the default of First Brands Group, the trailing 12-month default rate by principal amount increased to 1.43% this week.
Source: Pitchbook Data, Inc./LCD, Morningstar LSTA US Leveraged Loan Index. Additional footnotes and disclosures on back page. Past performance is no guarantee of future results. Investors cannot invest directly in the Index. *The Index’s average nominal spread calculation includes the benefit of base rate floors (where applicable)
Monthly Recap: September 2025
In September, risk assets sustained their strong performance, with equities posting robust gains and credit spreads remaining in a tight range. Jobs data continued to underwhelm with payrolls registering just a small +22k gain, while the unemployment rate ticked up to 4.3%. Key inflation measures were largely mixed, as softer PPI data at -0.1% month-over-month (versus +0.3% expected) eased some inflationary concerns that transpired earlier in the month after the release of a stronger CPI print which came in at +0.4% month-over-month (versus +0.3% expected). With this backdrop, the Fed delivered a 25 bps rate cut at the September FOMC meeting, with the median dot plot projecting two additional 25 bps cuts by the end of the year.
The US loan market returned 0.44% in September, which marked the lowest return in five months. The softer performance was largely driven by a steep sell-off in a larger issuer within the Index, First Brands Group (an Automobile Components issuer), which came under pressure during the month due to idiosyncratic challenges. The company’s sizable weighting and sharp decline in trading levels resulted in a 19 bps drag to performance during the month. This was also reflected in the weighted average bid price of the Index falling by 13 bps to 97.06, leading to negative market value returns for the month (-0.19%). Across ratings, the Single-B cohort lagged both BBs and CCCs during the month, primarily due to First Brands Group. Similarly, the Automobile Components was a notable sector laggard at -10.94%, although this represents a relatively small portion of the Index (less than 1.5%). Notable standout sectors included Specialty Retail, Electronic Equipment Instruments & Components, and Building Products, which all registered returns above 1.2% for the month. On a YTD basis, the asset class has returned 4.63%, with still elevated interest income helping offset market value declines of 1.34%.
The primary market was busier in September, coming off a seasonally slow August. Including repricing activity, total institutional volume was $129 billion, well ahead of last month’s $51.5 billion. Net of repricing activity, total volume was about $54 billion, with a healthy mix of M&A, refinancings, and dividend recapitalizations launched during the month. YTD supply (excluding repricings) has now reached $369 billion, which is about 9% below last year’s pace. On the demand side, CLO issuance downshifted to $11 billion – the lightest volume since January of this year. However, YTD issuance has now eclipsed $153 billion and is still up 8% YoY. On the other hand, retail loan funds experienced an outflow of $878 million in September, bringing YTD net outflows to $6 billion, the bulk of which occurred in April during the tariff-related uncertainty.
The traditional loan payment default rate increased to 1.47% from 1.15% last month due to First Brands’ bankruptcy, which added 32 bps to the trailing default rate and marked the ninth-largest default in the history of the asset class. On the positive side, LCD’s dual-rate tracker that includes LME activity eased to 4.32% (from 4.37% in August), as a few loans rolled off the trailing calculation and just one was added. We expect defaults in the loan market to continue to skew heavily towards distressed exchanges and LMEs.
Source: Pitchbook Data, Inc./LCD, Morningstar LSTA Leveraged Loan Index. Additional footnotes and disclosures on back page. Past performance is no guarantee of future results. Investors cannot invest directly in the Index. *The Index’s average nominal spread calculation includes the benefit of base rate floors (where applicable).