Senior Loan Talking Points – July 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

  • Broad market volatility modestly dampened loan market momentum this week, as the average bid of the S&P/LSTA Leveraged Loan Index (the “Index”) slipped three bps, to 98.35. Still, the Index had a positive return of 0.04%.
  • The new issue pipeline was rife with action coming out of the holiday weekend, as arrangers picked up right where they left off in June. Marked by a blend of transactions, roughly $12.3 billion of new volume was launched over the course of the week.
  • Looking forward, new supply is lagging anticipated repayment activity by roughly $1.9 billion, compared to $10.7 billion in the prior estimate.
  • In the secondary market, fifteen deals allocated this week with strong break prices evidenced across the board. There were also a handful of gainers on the back of company-specific news in what remains a well-bid market.
  • On the demand side, retail loan funds posted $629 million of inflows according to Lipper for the five business days ended July 7, while five new CLOs were issued, brining YTD totals for this segment to $84.8 billion.
  • There were no defaults in the Index this week. With roll-off of older defaults, the current trailing-12-month rate now sits below 1%, at 0.58% by principal amount.
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.

June

With the new issue pipeline accelerating in June due to M&A action and investors continuing to show strong interest in the asset class, the loan market sustained its streak of positive monthly advances, as the Index gained 0.37% in June. Performance cooled a bit relative to the previous two months when the Index returned an average of 55 bps. Contribution factors in June included both interest income and market value appreciation with the average Index bid closing out the month at 98.37, up by 28 bps from May levels.

Higher-yielding, riskier cohorts continued to outperform in June, a common theme since the onset of the price recovery experienced last April. Yield-hungry investors pushed up average bids of CCC-rated loans to 92.67 at the end of June, the highest reading since 2015. This produced a gain of 1.00% for the volatile cohort, while Single-Bs and BBs trailed at 0.40% and 0.12%, respectively. Moreover, second liens outperformed first-lien loans for the 14th consecutive month and to the tune of 89 bps in June. Drilling into sector performance, total returns were led by Nonferrous Metals/Minerals, Cosmetics/Toiletries, Air Transport, and Oil & Gas (all returned above 1% for the month).

Technicals remained supportive for loan investing and the demand/supply balance was in good standing in June. The primary market saw a robust $58.4 billion of new offerings for the month, easily surpassing May’s total of $34.8 billion. The uptick was spurred by a heavy dose of M&A and LBO-related loans coming to market, as such transactions comprised nearly two-thirds of the entire deal flow. On the other side of technical ledger, loan demand remained robust, supported by a very busy CLO market, which has been boosted by the strong new-issue pipeline, attractive arbitrage, strong investor demand and relatively tight liability spreads. With another $14.4 billion priced in June, CLO formation is tracking the busiest pace on record (at nearly $80 billion YTD), as investors continue to find the yields offered across the debt stack attractive relative to other securitized products.  Meanwhile, retail loan funds saw strong inflows with $3.6 billion allocated in June, bringing YTD totals to roughly $27 billion.

Default activity remained non-existent in the loan market, as the Index’s trailing-12-month default rate by principal amount declined to just 1.25% and remains well below the historical average for the asset class.

1715850

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 July 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.