Senior Loan Talking Points

Broader equity markets lost some momentum this week, as returns were softer compared to the strong pace set over the past few weeks. Despite this, credit markets remained firm, with elevated yields helping spur strong demand across most spread products. The U.S. loan market, as represented by the Morningstar LSTA U.S. Leveraged Loan Index (Index), returned 0.10% for the seven-day period ending June 4, while the weighted average Index bid price gained four basis points (bps), ending the week at 95.30. 

The primary market continued to see robust M&A activity, with several deals launched this week, totaling approximately $7.8 billion. Notably, many of these new M&A transactions were from BB-rated borrowers, contributing to the abundance of higher-quality M&A supply in the second quarter so far. After accounting for roughly $24 billion in anticipated repayments not associated with the forward calendar, repayments now exceed supply by $2.2 billion, compared to last week's positive net new issue supply of $7.7 billion. The weekly change was largely due to the record-setting Warner Bros. Discovery deal, which priced $13 billion in dollar-denominated term loans last week. 

The secondary market remained resilient, with performance continuing to be led by BB and B-rated loans, while CCC-rated loans experienced negative returns. YTD performance by ratings and industries highlights the persistent bifurcation and dispersion seen in the loan market this year, which has been amplified by the Iran conflict and the ongoing impact of AI-driven risks. 

Investor demand remained robust, as CLO managers priced nine new deals this week, pushing YTD issuance above $70 billion. U.S. retail loan funds attracted $179 million of inflows for the week ending June 3, according to Morningstar, reversing the previous week's $48 million outflow and marking the fourth inflow in the past five weeks. 

There were no payment defaults in the Index this week.

Middle East developments remained the key market driver in May. Markets started strong as reports suggested the U.S. and Iran were close to a framework agreement, causing oil prices to fall sharply early in the month. The positive momentum was reinforced by a stronger-than-expected U.S. jobs report for April. However, sentiment deteriorated mid-month after it became increasingly clear that the ceasefire was fragile, which when combined with stronger U.S. inflation data, led to renewed concerns about prolonged high oil prices and persistent inflation. As a result, government bond yields climbed to multi-year highs across most major global markets. Sentiment improved again late in the month as reports indicated progress toward an interim U.S.–Iran agreement and a possible reopening of the Strait of Hormuz, which helped ease stagflation concerns and resulted in a near-full retracement in Treasury bond yields. The S&P 500 reached a new record high, while renewed enthusiasm around AI drove strong performance in semiconductor stocks. Across fixed income markets, credit spreads remained relatively rangebound and were supported by strong technicals. 

The U.S. loan market was steady in May, as the Index returned 0.51%, which is above the trailing 12-month average of 0.42%. After a strong price performance in April, the market value component of returns was a negative 10 basis points in May. The average Index bid price was flat and ended the month at 95.33. Beneath the surface, bifurcation remained highly prevalent, as the percentage of loans trading above par increased to 40%, while the percentage of loans trading below 90 expanded to 12%. Across sectors, IT services and chemicals were key outperformers, while media and building products lagged the broader market. The topical software space registered a positive return for a third consecutive month, but there was notable dispersion among different issuer constituents. In general, the overall secondary market was firm for higher quality credits given the strong, demand-driven technicals, as BBs and Bs delivered similar returns to the Index, while CCCs were firmly in the negative territory. 

While new supply increased in May, when combined with repayment activity, it failed to keep up with the strong pace of new demand via increased CLO issuance and a recovery in retail fund inflows. As a result, the supply/demand imbalance deepened in May. For the month, arrangers launched a total of $40.6 billion (ex-repricings), the most since January, with most of that volume tied to acquisition-related activity. YTD supply (excluding repricings) is tracking roughly $173 billion, which is nearly in line with last year’s pace for the comparable period. With the secondary backdrop remaining stable, repricing transactions experienced a notable pick-up in May, as $53.2 billion of loan outstandings were repriced, with 57% coming from BB- and higher-rated borrowers. On the other hand, demand was strong across the measurable investor segments. CLO issuance improved with $16.4 billion priced across 34 deals, more than double last month’s total. At nearly $70 billion, YTD issuance has been more muted compared to last year’s record-setting pace (down 18% year-over-year), primarily driven by April’s issuance lull. US retail loan funds experienced solid inflows in May, with Morningstar reporting a net inflow of $1.3 billion for the month, the most since February 2025. However, net flows remain firmly negative for the YTD period at $5.6 billion. 

The last twelve months (LTM) traditional payment default rate was steady in May, increasing by a single basis point to 1.35%. There were three new payment defaults during the month, with one dropping off the trailing 12-month tally, but given their small size, this did not lead to a meaningful pick-up in the trailing payment default rate by principal amount. Liability-management exercise (LME) activity increased, as five new LME defaults were recorded during the period. As a result, Pitchbook’s dual-rate tracker that combines traditional payment default activity with LMEs increased to 3.11%, from 2.84% last month, a level that remains well below the recent peak of 4.70% registered in December 2024.