Senior Loan Talking Points

Jeffrey Bakalar

Jeffrey Bakalar

Group Head and Chief Investment Officer, Senior Loans

Dan Norman

Dan Norman

Group Head and Senior Managing Director, Senior Loans

  • The U.S. loan market started the new month off on a strong note, as the S&P/LSTA Leveraged Loan Index (“Index”) returned 0.30% for the five business days ended Dec. 5. The average Index bid increased by 19 basis points (“bps”), to 95.76.
  • New issue activity appears to be winding down into year-end. The amount of net new supply expected to enter the market totaled $6.3 billion, down slightly from last week’s estimate of $7.3 billion.
  • In the secondary market, not surprisingly, the big single B cohort outperformed, supported by favorable technicals and shifting investor sentiment to relative value. As indicated in prior Talking Points, the differential between average credit spreads for B and BB had, in our view, gotten too wide relative to the general consensus on the overall economic/earnings outlook.  We expect the trend to continue, at least through YE.   
  • One CLO priced this week, which brings YTD issuance to a robust $110.5 billion. Retail loan funds reported a small outflow of $94 million for the five business days ended Dec. 4 (per Lipper FMI universe*).
  • There were no defaults in the Index during the week.
Average Bid
Average Three Year Call Secondary Spreads
Lagging 12 Month Default Rate
Index Stats

*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.

November

Secondary prices recovered in November following a three-month slump, leading to a positive reading for the asset class. At 0.59%, the loan Index posted its strongest advance since July, bringing the year-to-date return to 6.94%. As market conditions improved, so did the average Index bid levels, ending the month at 95.58, which was a 17 bps improvement from the prior monthly estimate.

Starting with supply, the growth of the Index has slowed this year to just a $4.4 billion monthly average, after growing by roughly $15.9 billion per month in 2018. Although weaker issuance levels have certainly played a role, the primary driver behind the contraction is due to a notable uptick in repayment activity. In November, repayments rose to $29 billion, resulting in the second highest reading this year. The majority of this amount was comprised of refinancing activity, particularly from borrowers rated BB- or better. A rise in opportunistic endeavors within the higher-rated category is not surprising given the recent spread compression for new-issues: the average spread of BB/BB– borrowers ended November at L+187.5, versus L+302 in June.

On the demand side, demand remained generally steady, underpinned by continued CLO issuance. For November, managers printed roughly $9.7 billion of new vehicles, down a notch from the $10.4 billion in October but in-line with the monthly average in 2019. The year-to-date figure has now reached $110 billion, which is the third-strongest year on record for the comparable period (through November).  Outflows from retail funds were present once again, but have tapered off since October. With another $1.7 billion withdrawn in November, retail loan funds have now experienced $41.8 billion of withdrawals since the beginning of October 2018.

From a ratings perspective, lower-quality credits outperformed for the first time since July. Single Bs returned 0.86% for the month, ahead of the Broad Index (+0.59%) and the BB-rated category, which returned 0.52%. CCCs were in the red with a return of -0.47%.

The Index’s default rate by amount outstanding reached a nine-month high of 1.48% after two issuers tripped defaults, representing a small increase from 1.43% in October.

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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 29, 2019.

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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Past performance is no guarantee of future results.