Senior Loan Talking Points

The loan market started off 2025 on a strong note, as the Morningstar® LSTA® US Leveraged Loan Index (Index) returned 0.24% for the seven-day period ended January 9. The average Index bid price gained 32 bp, finishing the week at 97.66. 

As the year begins, repricings are dominating the market, with approximately $30.8 billion repriced for the week. Excluding repricings, total institutional volume was about $13.8 billion. In the forward calendar, net of the anticipated $22.4 billion of repayments not associated with the forward pipeline, the amount of new supply projected to enter the market is about $283 million, versus repayments outstripping new supply by $5.6 billion last week. 

In the secondary market, trading levels were steady across all rating cohorts. In terms of performance, CCCs outperformed this week, posting a strong return of 0.39%. Meanwhile, Single-Bs and Double-Bs returned 0.24% and 0.21%, respectively. 

CLO managers have yet to issue a new vehicle in the new year. According to Morningstar, retail loan funds experienced an inflow of $981 million for the week ended January 8, which includes $698 million to ETFs. 

There were no defaults in the Index during the week.

The loan market returned 0.57% for the month, capping off another strong year for the asset class in which the Index gained 8.95% (the second-best performance in eight years, behind 13.32% in 2023). Coupon carry remained a key driver of performance for the month as it has all year, as the market value component of return was slightly negative at -0.13%. Looking at the other riskier asset classes and treasuries, loans outperformed on both a MTD and YTD basis. For the month, investment grade, high yield bonds and the US 10-year treasury were in the red at -1.92% (Morningstar US Corporate Bond Index), -0.43% (Morningstar US High-Yield Bond TR USD) and -2.62% (S&P 10-year Treasury Index), respectively. 

Secondary loan prices rallied in the first half of the month, reaching a high of 97.52, the strongest reading since April 2022. However, the average bid price slipped slightly following the Fed’s decision, closing the month at 97.33, but up from 97.25 in November. By credit quality, there weren’t any notable themes in the final month of the year, as performance was relatively uniform across all categories with respective returns of 0.54%, 0.54%, and 0.60% for BBs, Bs and CCCs. On a YTD basis, Single-Bs outperformed with a total return of 9.55%. 

The primary market was extremely busy in the final month of the year, as market participants worked through a record amount of repricing transactions before the year-end holiday slowdown. Total repricing volume was $153 billion for the month, a new monthly record for the asset class. Total repricing volume for the year including re-syndicated repricings was nearly $800 billion. Roughly 60% of the Index repriced in 2024, with the Index’s nominal spread decreasing by 28 bp over that time timeframe to S+341 bp, while borrowers saved an average of 52 bp on their spread. Away from repricings, total supply was $27.8 billion in December, while full-year totals amounted to $501.2 billion. The majority of the full-year supply was refinancing transactions, as M&A activity remained subdued. 

Investor demand remained strong, as evidenced by continued CLO issuance and retail inflows. However, CLO issuance moderated in December from a record set in November, with total volume and deals coming in at $10.8 billion and 23 transactions, respectively. 2024 full-year issuance set a new annual record at $201 billion with AAA spread and average liability cost of the cap stack meaningfully declining. On the retail side, LCD reported $1.8 billion of flows in December, bringing the YTD total to $9.6 billion. 

There was one default in the Index during the month (Container Store). The trailing 12-month default rate by principal amount decreased slightly to 0.91%, and we expect only a gradual increase in traditional defaults over the medium term. Default activity continues to skew towards distressed exchanges and LMEs. For context, the loan default rate inclusive of LMEs closed out the year at 4.70%, having increased from 3.84% at the beginning of the year.