Senior Loan Talking Points

Trading levels continued to decline in the loan market, as the weighted average bid price of the Morningstar LSTA US Leveraged Loan Index (Index) fell by 12 basis points (bps) to 97.29. The bulk of the drop occurred during last Friday’s trading session following a large downward revision to employment numbers in May and June, which materially raised the odds of a rate cut in September. This led to a broader sell-off across risk assets. Still, the Index was able to register a positive return of 0.03% for the seven-day period ended August 7 due to its robust level of coupon income. 

In the primary market, new-issue activity remained elevated. Arrangers launched a diverse mix of transactions, including repricings, refinancings and acquisition-related deals. Excluding repricings, total new-issue activity for the week was $18 billion, with a little more than half of that volume tied to refinancing supply. Looking ahead, net of approximately $31.7 billion of anticipated repayments that aren’t associated with the forward calendar, repayments outstrip supply by roughly $11.8 billion, compared to repayments outstripping supply by $12 billion last week. 

Loan earnings continued to trickle in this week, as a bevy of issuers reported second quarter results with a few seeing their secondary prices move higher on the back of solid results. However, more broadly, market participants were more cautious this week due to the weaker macro tone, which resulted in the notable underperformance of CCCs (-0.17%) with their respective bids falling by 41 bps. 

In line with recent trends, CLO issuance continued at a strong clip, as eight new deals priced this week. There has been $126.2 billion of CLO issuance this year, which is outpacing last year’s record tally for the comparable period. Retail loan funds posted a $78 million inflow, according to Morningstar, rebounding after two weeks of modest outflows. 

There were no defaults in the Index this week.

Investor sentiment within broader financial markets continued to firm, as the US announced several deals with trading partners, economic data remained solid, and the corporate earnings season continued to demonstrate resilience. Against this backdrop, the US loan market rallied alongside other risk assets, as the Index returned 0.88% in July. Performance reflected both interest income and market price appreciation, as the latter was boosted by a 34 bps increase in the weighted average Index bid price, which rose to 97.41 during the month. 

Similar to June, lower-quality credits outperformed, with CCCs leading the way. For the month, BB-, B-, and CCC-rated loans registered returns of 0.59%, 0.97%, and 1.50%, respectively. On a YTD basis, B-rated loans are now the key outperformer within the asset class and are modestly ahead of BBs for the YTD period (3.81% vs. 3.69%). 

The primary market had the busiest month on record, as arrangers launched a mix of deals, including both refinancings and M&A paper, as well as a fresh wave of new repricing transactions. Total institutional volume ex-repricings totaled $54 billion, the most since January. Repricing activity picked up sharply, totaling about $159 billion during the month, which was a new monthly record for the asset class. On the demand side, CLO issuance was robust, with about $23 billion issued in total for the month across 45 deals. The YTD tally has now already eclipsed the $120 billion mark and is ahead of last year’s record-breaking pace for the comparable period by 7%. Looking at the other key demand segment, retail inflows totaled $958 million for the month, which brings the consecutive streak of inflows to three months. However, YTD flows still remain negative at about $5 billion given April’s sizable outflows. 

Default activity was modest in July, as one issuer filed for bankruptcy, while two completed liability management exercises (LMEs). With one issuer rolling off the trailing 12-month calculation and a new one joining, the traditional payment default rate without LMEs remained unchanged at 1.11% by principal amount. On the other hand, the loan default rate with LMEs modestly ticked up to 4.56% from 4.46% in June.