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.
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.
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).