Senior Loan Talking Points
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Senior Loan Talking Points

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Mohamed Basma

Mohamed Basma, CFA

Managing Director, Head of Leveraged Credit

Weekly Notables

The loan market traded higher post Labor Day Holiday. For the seven-day period ended September 5, the Morningstar® LSTA® US Leveraged Loan Index (Index) returned 0.16%. The average Index bid price moved up by 24 bp, closing out the week at 96.74.

Activity in the primary market picked up from last month’s slowdown. Most of the deals launched in the market during the week were related to M&A and LBOs. Total institutional volume for the week amounted to $17 billion, with about $7.3 billion tied to acquisition related deals. Looking at the forward calendar, net of the anticipated $17 billion of repayments not associated with the forward pipeline, the amount of new supply projected to enter the market is about $5.4 billion, up from $1.7 billion on August 28. 

In the secondary market, CCCs regained their strong momentum after last month’s losses, as the average bid price of the cohort increased by 227 bp over the course of the week. Meanwhile, Double-Bs gained 3 bp, but Single-Bs slipped by 2bp. In terms of returns, CCCs outperformed the broad Index and the higher-rated cohorts, delivering a 0.40% return. Single-Bs and Double-Bs returned 0.16% and 0.12%, respectively. 

There were no CLOs issued in the week ended September 4. In the retail space, after experiencing five consecutive weeks of significant outflows, the loan funds saw a modest inflow of $37 million for the week ended September 4 (Morningstar Direct). 

There were no defaults in the Index during the week.

Average Bid
September 1, 2020 to September 5, 2024
Average Bid
Average 3-YR Call Secondary Spreads 1,2
August 1, 2020 to August 31, 2024
Average 3-YR Call Secondary Spreads 1,2
Lagging 12 Month Default Rate 3
September 1, 2020 to September 5, 2024
Lagging 12 Month Default Rate 3
Index Stats
Index Stats

Source: Pitchbook Data, Inc./LCD, Morningstar ® LSTA ® Leveraged Loan Index. Additional footnotes and disclosures on back page. Past performance is no guarantee of future results. Investors cannot invest directly in the Index. *The Index’s average nominal spread calculation includes the benefit of base rate floors (where applicable).

Monthly Recap: August 2024

Despite market volatility in early August, the loan market remained resilient and closed out the month on a positive note. The index returned 0.63% in August (the third weakest monthly return in 2024). This compares to the monthly average of 0.80% (January to May 2024) and 0.35% and 0.68% in June and July, respectively. The average bid price recovered from earlier declines in the month and gained 15 bp, finishing August at 96.75. Loans continued to benefit from higher coupon rates and returned 5.78% so far this year, ahead of investment grade, but behind high yield bonds. Amidst anticipated rate cuts, the high yield bond market posted solid performance this month with a 1.62% gain, bringing the YTD return to 6.32% (Morningstar US High-Yield Bond TR USD). Meanwhile, investment grade bonds returned 1.55% for the month and 3.53% YTD (Morningstar US Corporate Bond Index).

Looking at ratings, Single-Bs outperformed this month, posting a positive return of 0.76%, followed by Double-Bs at 0.62%. On the other hand, CCCs were in the red at -0.05%. On a YTD basis, CCCs remained in the lead at 6.40%, while Single-Bs and Double-Bs returned 6.13% and 5.31%, respectively.

In the primary market, activity was light due to late summer market slowdown and risk-off sentiment. Repricings fell to their lowest level since June 2023 to $1.2 billion. For context, the average repricing volume between January and July 2024 was about $64.7 billion. According to Morningstar, about 34% of the loan Index has been repriced this year. Due to increased repricing activity, borrowers have reduced their credit spread by an average of 54 bp. Meanwhile, new issue supply reached its lowest point since December 2022. Total new issuance and amendments in August were about $8.8 billion. On a YTD basis, refinancing activity remains at an all-time high pace at $186 billion. In contrast, M&A supply is currently tracking $75.3 billion and remains below every comparable period between 2013 and 2022, but ahead of last year’s volume of $34.5 billion for the same period.

On the investor front, demand for the asset class fell after retail investors withdrew about $6.9 billion from loan funds. This represents the first negative month since October 2023 and brings YTD inflows to $2.25 billion into the asset class. On the other hand, CLO issuance continued at a strong pace. There were 32 deals priced during the month, totaling $14.9 billion (up from $13.2 billion across 29 deals in July). However, CLO formation slowed as compared to the average levels observed in the first half of 2024. Nonetheless, this year’s issuance of $129.5 billion/275 deals is at the second fastest pace on record, following the strongest issuance year of 2021.

There were no defaults in the Index during the month. The trailing 12-month default rate by principal amount decreased to 0.78% from 0.92% in July.

index stats

Source: Pitchbook Data, Inc./LCD, Morningstar ® LSTA ® Leveraged Loan Index. Additional footnotes and disclosures on back page. Past performance is no guarantee of future results. Investors cannot invest directly in the Index. *The Index’s average nominal spread calculation includes the benefit of base rate floors (where applicable).

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Unless otherwise noted, the source for all data in this report is Pitchbook Data, Inc/LCD.  Pitchbook Data/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 June 23, 2023.

2. Excludes facilities that are currently in default.

3. 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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