Investment Management

Senior Loan Talking Points - Shifting Gears

Voya Perspectives Series | Talking Points | February 9, 2017

Voya Senior Loan Group - Shifting Gears

  • Refinancing activity maintained its hold as the main driver of senior loan issuance over the course of a week that saw recent frenzied primary activity kick into a somewhat lower gear. The S&P/LSTA Leveraged Loan Index (the “Index”) gained 0.07%, and the average bid for loans dropped by a minimal two bps, to 98.12.
  • M&A deals continue to compromise a smaller portion of the primary (37% of volume over the last month was in support of acquisition-related transactions), while refinancings, which made up approximately 80% of this week’s volume, maintain their spot at the head of the crowd. Looking ahead, when factoring out the $20.04 billion of expected repayments not associated with the forward calendar, net new supply poised to enter the market totals about $8.84 billion, up modestly from last week’s $8.06 billion. Despite the pipeline standing at about the prior week’s levels, market movers anticipate the pace of issuance to slow down slightly.
  • The secondary, which recently saw some retail-related softness, showed signs of firming again. New loans are holding on to healthy break prices, and the average such price for first-lien institutional loans rose to 100.49% of par in January, up from December’s 100.33%. This is the highest average break price level since January 2014.
  • Five CLO transactions priced this week, which brings MTD and YTD issuance to $3.2 billion and $4.2 billion, respectively. Retail loan funds in the Lipper FMI universe enjoyed $994 million of inflows.
  • Returns were in the black across the below-investment grade ratings cohorts. CCCs gained 0.34%, and their average bid increased by 11 bps, to 85.85. Single Bs, the average bid for which bumped up two bps, to 98.58, gained 0.06%. BBs returned 0.03%, though their 100.10 average price was a four bps decline.
  • There were no defaults in the Index this week. The default rate by amount outstanding is 1.41%.
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    February 9

    Voya Senior Loan Strategy

    The Voya Senior Loan Group is a part of Voya Investment Management. The team is comprised of 28 investment professionals and 27 dedicated support staff. There are five portfolio management teams in Scottsdale, each of which is responsible for particular industries, and a team located in London that is responsible for sourcing overseas loans.

    The Voya Senior Loan Strategy is an actively managed, ultra-short duration floating rate income strategy that invests primarily in privately syndicated, below investment grade senior secured corporate loans. Senior loans are floating rate instruments that can provide a natural hedge against rising interest rates. They are typically secured by a first priority lien on a borrower’s assets, resulting in historically higher recoveries than unsecured corporate bonds.

    General Risks for Floating Rate Senior Bank Loans: Floating rate senior bank 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 bank 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 bank 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.

    Unless otherwise noted, the source for all data in this report is Standard & Poor’s/LCD. S&P/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 February 3, 2017.]

    2 – Excludes facilities that are currently in default.

    3 – Comprises all loans, including those not tracked in the LSTA/LPC mark-to-market service. Vast majority are institutional tranches. 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.

    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) interest rate levels, (4) increasing levels of loan defaults, (5) changes in laws and regulations and (6) 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.

    Voya Investment Management Co. LLC (“Voya”) is exempt from the requirement to hold an Australian financial services license under the Corporations Act 2001 (Cth) (“Act”) in respect of the financial services it provides in Australia. Voya is regulated by the SEC under US laws, which differ from Australian laws. This document or communication is being provided to you on the basis of your representation that you are a wholesale client (within the meaning of section 761G of the Act), and must not be provided to any other person without the written consent of Voya, which may be withheld in its absolute discretion.

    Voya Compliance Approval ID IM-0210-30926-0218

    Past performance is no guarantee of future results.

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