Senior Loan Talking Points – September 24, 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

  • The loan market’s recent run of consecutive weekly advances came to a halt this week, as the S&P/LSTA Leveraged Loan Index (the “Index”) returned -0.52% for the seven-day period ended September 24. The reversal was underpinned by a 57 bps reduction in the average Index bid price, which finished the week at 93.38. Despite the softness, MTD returns remain well into positive territory, at 0.80%.
  • While new-issue volume trailed last week’s pace, the primary market remained active with a total of 19 deals launched. This pushed MTD totals to $30.5 billion, second only to January’s figure of $64.7 billion. In the forward pipeline, repayments still outstrip expected supply; however, this figure was trimmed to just $3.0 billion, compared to $10.7 billion last week.
  • Secondary trading saw a pull-back this week, most notably in the higher-rated segments of the market.
  • CLO arrangers stayed busy, with four new transactions issued this week. For the month, CLO issuance is just under $5.0 billion, while YTD totals currently stand at $53.1 billion. Additionally, retail loan funds/ETFs saw a small, albeit positive inflow ($13 million) for the five business days ended September 23.
  • The Index experienced two defaults this week (Garret Motion and FTS International). As a result, the default rate by amount outstanding increased to 4.17%.
Average Bid
Average Three Year Call Secondary Spreads
Lagging 12 Month Default Rate
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.

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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 September 18, 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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