Senior Loan Talking Points – November 5, 2020

Jeffrey Bakalar

Jeffrey Bakalar

Group Head and Chief Investment Officer, Senior Loans

Dan Norman

Dan Norman

Group Head and Senior Managing Director, Senior Loans

  • In a week highlighted by the U.S. Presidential Election, market sentiment was boosted by the calming of pre-election jitters, despite an election outcome not yet determined. The S&P/LSTA Leveraged Loan Index (the “Index”) rallied alongside other asset classes, returning 0.58% for the weekly period ended November 5, while the average Index bid moved up 47 bps, to 93.71. The Index also moved well into positive territory, as the YTD return currently stands at 0.17%.
  • Primary market issuance was virtually put on pause, as arrangers remained on the sidelines while votes were being counted. Looking ahead, the forward pipeline decreased this week. Net of the $15.2 billion in anticipated repayments, the amount of repayment activity now outstrips new supply by $2.8 billion, versus net new supply of $3.8 billion last week.
  • Secondary trading levels firmed with all rating buckets seeing notable price gains. Additionally, it was a busy week on the earnings front, as roughly 60 public issuers reported this week, with most topping consensus estimates as reported by LCD.
  • Investor demand was buoyed by continued CLO issuance, as seven new vehicles were issued this week. YTD issuance has now eclipsed the $73 billion mark. For the five business days ended November 4, retail mutual funds/ETFs reported an outflow of $274 million.
  • There were no defaults in the Index this week.
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

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.

October

The senior loan market saw healthy price improvement for the first three weeks of October until volatility poured in broad risk markets, paring down a large chunk of gains in the final week of the month. Sentiment was hampered by a resurgence of COVID-19 cases across Europe and the U.S., igniting concerns of new potential lockdown measures. Overall, the Index finished with a 20 bps gain for the month and is now at -0.46% for the YTD period.

Secondary trading levels were virtually flat, as the average Index bid price closed out the month at 93.87, one basis point below September. From a ratings perspective, lower-rated cohorts outperformed during the month despite the late-month softness. CCCs gained 0.41%, ahead of single-Bs and BBs, which returned 0.27% and -0.04%, respectively. Sector performance was mixed, as top gainers were Home Furnishings and Clothing/Textiles, while a notable laggard included the Leisure sector, which continues to be under pressure due to virus concerns and social distancing measurers.

Turning to market technicals, the primary market remained in high gear, as roughly $38.6 billion was launched into syndication.

For context, the combined $82.3 billion from the last two months surpassed the entire total from March to August. In October, 52% of the new paper represented recaps and refinancings, while about 41% was tied to acquisitions and buyout-related activities. At the same time, repayments increased to $33 billion in October, representing an eight-month high. On the demand side, CLO formation totaled a healthy $10.3 billion, as tightening liability costs and increased loan supply have led to a resurgence in issuance over the past two months. YTD issuance is now at roughly $71 billion, which is approaching the original full-year consensus forecast of $80-90 billion. On the other hand, the loan retail segment witnessed an outflow of $254 million for the month. It’s worth noting that the pace of redemptions has materially slowed since the summer, further evidenced by a two-week inflow in October, the first consecutive weekly inflow since January.

Default activity slowed in October with just two new Index constituents defaulting. As a result, the trailing-12-month default rate by principal amount decreased by 6 bps, to 4.11%, from 4.17% in September.

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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 October 30, 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 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.