Senior Loan Talking Points - May 7, 2020

  • Senior loans reflected a healthier tone this week, as the S&P/LSTA Leveraged Loan Index (the “Index”) gained 0.27% for the five business days ended May 7. Price action was generally softer to start the week before a strong rally led to an outsized gain during Thursday’s trading session, much of which was driven by earnings news. This pushed the average Index bid to 86.25, representing a 14 basis point (“bps”) improvement from the prior week.
  • Primary market activity remained subdued but showed some signs of life, as a few new deals were launched into syndication. Proceeds from this week’s deal flow were mostly used to refinance existing debt. Predictably, repayments continue to outpace new supply in the forward pipeline (net of expected repayments), although by a lesser amount this week ($6.5 billion vs. $7.7 billion). 
  • Two CLOs were priced during the week, bringing the YTD figure to $22 billion. Retail fund flows, on the other hand, remained negative. For the five business days ended May 5, investors withdrew $549 million from the loan mutual fund and ETF space.
  • Downgrade activity softened up this week, with 19 facilities downgraded by S&P Global Ratings, compared to 39 a week ago. From the new pool of lowered loans, only two were dropped into the CCC-rated cohort. The Index experienced two defaults this week (J. Crew and Skillsoft).
Average Bid S&P/LSTA Leveraged Loan Index
Average Three Year Call Secondary Spreads S&P/LSTA Leveraged Loan Index
Lagging 12 Month Default Rate S&P/LSTA Leveraged Loan Index
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.

April

The U.S. loan market staged a strong rally in April, recouping some of the unprecedented losses experienced in March. The Index posted a gain of 4.50%, resulting in the largest monthly advance post-GFC crisis. April’s strong performance was in line with other risk markets, as the healthier sentiment was buoyed by investor hopes of parts of the U.S. economy reopening. This had a positive impact on secondary trading, which is evidenced by the advancer/decliner ratio of Index loans, as about 75% reported price improvements, leading to 326 bps gain in the average Index bid price, to 86.11. Despite being marked by good volumes, secondary trading continued to be uneven, as evidenced by the average bid-ask spread remaining roughly three times wider than in January. 

While looking at the quality breakdown, this month’s rally was led by the single-B rating cohort, which returned 4.99%. BBs and CCCs returned 4.12% and 4.00%, respectively. Performance among S&P industries was led by the Oil & Gas sector, which posted a strong rebound on the back of improved sentiment in the energy space. Elsewhere, defensive sectors such as Cable and Food Products continue to weather the storm better than the industries directly impacted by COVID-19 (travel and leisure-related business, and traditional retailers). 

Regarding market technicals, while new issuance continues to be sparse, at least for now, the equation was more balanced due to a significant slowdown in retail redemption activity. This figure was just $3.4 billion in April, compared to the $14.7 billion outflow reported in March. At $3.4 billion, CLO issuance was roughly on par with the $3.6 billion produced in March.

Looking ahead, downgrade activity is likely to remain a headwind over the immediate horizon.  To illustrate the frantic pace of this action thus far, the rolling three-month ratio of downgrades to upgrades in the Index accelerated to a 23.4x in April, compared to 11.4x in March and just 3.8x in February. Furthermore, default activity, unsurprisingly, increased during April, as eleven Index constituents tripped defaults, surpassing the previous monthly record of ten defaults from October 2009. The Index’s trailing-12-month default rate inched closer to the historical average, finishing April at 2.32% by amount outstanding.

20200508-1180990-3558507

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 May 1, 2020.

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 twelvemonth 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.