Senior Loan Talking Points

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

  • The loan market posted a solid advance coming out of the holiday weekend, as the S&P/LSTA Leveraged Loan Index (the “Index”) returned 0.15% for the seven-day period ended September 9.  Market value appreciation and interest income both contributed to this week’s performance, as the average Index bid price moved up seven bps.
  • As largely expected, a bevy of new deals hit the primary market this week following the seasonal slowdown in late August. In total, loan arrangers launched nearly $15 billion of new loans, mostly tied to LBOs and other acquisition-like activities, which accounted for roughly 70% of all deal flow.  In the forward pipeline, new supply continued to outstrip expected repayments but by a smaller amount relative to the last estimate ($6.9 billion vs. $8.1 billion).
  • Secondary trading activity was relatively quiet in the shortened trading week. However, a few companies saw their loans move more disproportionally relative to the broad market on the back of company-specific news.
  • Investor demand remained healthy, as evidenced by persistent CLO issuance and retail fund inflows. Starting with CLOs, five new deals were issued this week, bringing YTD totals to $115 billion. Loan funds, on the other hand, posted a net inflow of about $718 million according to Lipper FMI, marking the seventh consecutive week of retail subscription activity into the asset class.
  • There were no defaults in the Index this week. September’s trailing-12-month default rate by principal amount is now at just 35 bps.
Average Bid: S&P/LSTA LLI
Average Bid: S&P/LSTA LLI
Average Bid: S&P/LSTA LLI
Average Bid: S&P/LSTA LLI
Average 3-YR Call Secondary Spreads: S&P/LSTA LLI 1,2
Average 3-YR Call Secondary Spreads: S&P/LSTA LLI 1,2
Lagging 12-Month Default Rate: S&P/LSTA LLI 3
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.

August

In August, demand for the asset class remained in high gear, led by record breaking CLO issuance and strong inflow activity into retail loan funds. Against this backdrop, the Index gained 0.47% for the month, a solid rebound from the slightly negative reading in July. The loan market has performed well in 2021, averaging about a 46 bps gain each month and is up 3.76% for the YTD period.

The secondary market’s trading levels, as measured by the average Index bid price, increased by 21 bps in August, closing out the month at 98.25. Average bid prices are now 17 bps shy of the post-pandemic high of 98.42 but up 206 bps from the 2020 final reading of 96.19. After lagging higher-quality credits last month, CCCs were back in the driver’s seat in August with a 0.95% gain, as investors searched for yield within the riskier parts of the market. Comparatively, Single-B and BB-rated paper posted returns of 0.45% and 0.41%, respectively. At the sector level, top performers were Radio & Television, Cosmetics/Toiletries, Conglomerates, and Nonferrous Metals/Minerals, while one notable laggard included Leisure Goods/Activities/Movies, which saw some weakness due to the spread of the delta variant.

 

On the loan supply front, new issuance waned in typical August fashion with just $20 billion of institutional loans launched during the period, compared to the robust $66.3 billion and $59.3 billion from the prior two months. All signs point to a busy close to the year in what has been a record pace of issuance for the asset class in 2021, led by merger and acquisition-related activity. From the demand side, investor flows were buoyed by $19.2 billion of CLO formation for the month, representing a new monthly high-water mark for the asset class. CLO managers have printed $111.6 billion on a YTD basis through August, which should eclipse the existing record of $129 billion from 2018. Retail loan funds saw a meaningful $2.2 billion investment influx in August and have been comfortably in positive territory for each month this year.

The Index experienced one default during the month, the first since February. Still, the trailing rate by principal amount continued to fall, and has now reached nearly a 9.5 year low of 0.47%. The current average is down 11 bps from the prior month and 370 bps from the pandemic peak of 4.17%.

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 September 3, 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.  

Voya Investment Management Co. LLC (“Voya”) is exempt from the requirement to hold an Australian financial services license under the Corporations Act 2001 (Cth) (“Act”) in respect of the financial services it provides in Australia. Voya is regulated by the SEC under US laws, which differ from Australian laws. This document or communication is being provided to you on the basis of your representation that you are a wholesale client (within the meaning of section 761G of the Act), and must not be provided to any other person without the written consent of Voya, which may be withheld in its absolute discretion.