Investment Management

Senior Loan Talking Points - Calmer Waters, At Least For Now

Voya Perspectives Series | Talking Points | January 28, 2016

Voya Senior Loan Group - Calmer Waters, At Least For Now

  • As bonds and equities engaged in a modest course correction this week, loans continued to demonstrate comparably low volatility, although the pace of primary and secondary activity remains modest. The S&P/LSTA Leveraged Loan Index (the “Index”) ended the week up slightly, despite average bid prices falling 9 bps to 90.21.
  • Though the sea of global markets settled down somewhat this week, the actionable new issue pipeline remained relatively sparse as investors showed themselves both cautious and selective. Arrangers brought but five new institutional deals to market as the primary emphasis remained on fine-tuning previously announced transactions. The announced forward calendar, largely M&A in nature, stayed constant at roughly $49 billion.
  • Although the sample was on the small side, new issue single B yields widened from 5.91% to 5.99%, while BBs remained steady at 4.78%.
  • The secondary market benefited from the relative calm. While commodity sectors recovered slightly and oil made a decent comeback from last week’s bottom of the barrel prices, focus in this part of the market turned to those borrowers that have recently experienced disappointing results, as well as on forthcoming earnings reports across these, and other, sectors.
  • Price performance by ratings cohort was mixed, with quality again leading the way. BBs were up 0.10%, or 21 bps, ending the week at 96.70. The Single B average bid of 90.21 was up nine bps, allowing this cohort to finish the week slightly down at -0.04%. CCCs were off a more substantial - 0.47%, with a 73.21 average bid that was 38 bps lower than the week before.
  • Retail outflows declined slightly, with $904 million leaving the loan space. CLO issuance finally commenced on the year, with two transactions pricing last week (one of which being brought to market by the team here at Voya) that together totaled $826.3 million – the late start obviously a sign of continued sensitivity to volatile markets on the structured side.
  • January 29

    Portfolio Managers

    Dan Norman

     Dan Norman

     Group Head, Managed Fund since 2000

    Jeff Bakalar

     Jeff Bakalar

     Group Head, Managed Fund since 2000

    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 January 22, 2016.]

    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.

    Past performance does not guarantee future results.

    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 IM0115-21165-0117

    Past performance is no guarantee of future results.

    Approved for client/investor use.

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