Senior Loan Talking Points - Global Volatility Elevates Investor Malaise
Voya Perspectives Series | Talking Points | February 11, 2016
Voya Senior Loan Group - Global Volatility Elevates Investor Malaise
- Volatility reigned in the capital markets this week as equities tumbled and oil fell below $27 a barrel. The loan market was not immune, as the S&P/LSTA Leveraged Loan Index (the “Index”) posted a return of -0.67% and a closing average bid price of 89.47.
- The secondary market was also pressured by a pick-up in BWIC (i.e., bids wanted in competition) activity, with five separate portfolios, totaling approximately $700 million, put up for sale. Not surprisingly, take up was sporadic, and relegated generally to higher quality loans.
- Another understandable by-product of greater uncertainty, the new issue pipeline continued to slim. The gross visible forward calendar ended the week at $47.7 billion, down from $55.3 billion. However, if we scratch below the surface, we see that the calculation of net supply paints a different picture. After deducting approximately $35 billion of pending inflows related to known repayments, we are left with a total net new supply of approximately $13 billion. We see that figure as quite manageable and a bit of a silver lining, at least providing some improved balance for market technicals.
- On the other side of the technicals coin, visible demand was negative for the week, with CLOs on the sidelines and continued steady redemptions from retail. Retail investors took out approximately $768 million based on S&P/LCD’s estimate for the five business days ended Feb. 10, versus outflows of approximately $409 million for the five business days ended Feb. 3 (Lipper FMI universe). Again, missing from this analysis is institutional activity, which, from our experience, appears to be relatively stable at this point.
- Returns for rating cohorts fell progressively in line by quality this week, with no one spared from market volatility but the riskier credits taking the largest share of decline. BB loans were down -0.55%, followed by single Bs at -0.70% and CCCs at -2.27%.
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 5, 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.
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