Senior Loan Talking Points – April 8, 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

  • Senior loans moved noticeably higher this week after a few weeks of relatively flattish performance. The S&P/LSTA Leveraged Loan Index (the “Index”) was up 0.32% for the seven-day period ended April 8, with the average Index bid increasing by 31 bps, to 97.86. YTD returns have now crossed the 2% mark.
  • The primary market remained active coming out of the holiday weekend, as arrangers syndicated about $9.5 billion of new paper. Given the borrower-friendly conditions, refinancings were the most prevalent, while acquisition-related deals were in the mix as well. When looking at the forward pipeline, net supply expected to come to market is approximately $16.6 billion, down from last week’s $19.7 billion.
  • Trading levels firmed in the secondary market with CCCs, on average, continuing to experience the strongest price advances. Additionally, issuer-specific news led to some upward movement for a handful of issuers. The pace of allocations has slowed a bit in April relative to March’s busy pace.
  • The CLO space saw four new CLOs priced during the weekly period, bringing YTD issuance to $41 billion. In the loan retail segment, LCD reported inflows of roughly $1 billion for the week ended April 7 based on Lipper FMI weekly reporters.
  • There were no defaults in the Index during the week. The default rate by principal amount has decreased in April to 2.61%.
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 LLI3
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.

March

Following eleven consecutive monthly advances, the loan market’s performance cooled in March with a flat return for the Index, as market value declines were offset by interest income. Secondary prices fell after solid price rallies in the first two months of the year. The average Index bid price was sent 24 bps lower during the month, to 97.55. In terms of asset class performance, loans were middle of the pack – ahead of 10-year Treasuries (-2.50%) and investment-grade corporates (-1.39% for BAML High-Grade Corp), but behind high-yield bonds and equities, which returned 0.17% and 4.38%, respectively for the BAML HY Master and S&P 500 (including dividends).

The outperformance of lower-rated credits did not subside in March with CCCs being the standout performers once again (+0.83%). Going up the credit quality scale, single-Bs posted a small loss of three bps, while BBs were noticeably softer at -0.27%. To further illustrate the risk-on environment, the riskier and higher-yielding second-lien credits outperformed significantly in March relative to first liens (1.45% vs. -0.04%).

On an industry basis, notable performers included the likes of Oil & Gas ad Food Products, while laggards were defensive sectors such as Radio & Television, Utilities, and Financial Intermediaries.

New-issue supply kicked into a higher gear in March, as roughly $74 billion of new institutional loans were launched over the period, the second most on record for the asset class.  M&A activity was a strong driver of the uptick, representing $28 billion of total volume, which resulted in a 14-month high. Other factors behind the strong supply were opportunistic transactions, such as refinancings and dividend recaps. On the demand side, CLO origination remained robust given lower liability costs, strong supply levels, and healthy investor interest for securitized products. In aggregate, a total of $14.7 billion of new vehicles were priced during the month, and YTD figures amounted to $38.8 billion through the first quarter. Meanwhile, retail loan funds saw another month of meaningful inflow activity, at roughly $4.1 billion according to LCD.

Default activity was non-existent in the month of March, as the Index default rate fell to 3.15% by amount outstanding.

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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 April 2, 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.

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Past performance is no guarantee of future results.