Senior Loan Talking Points - A Good Week
Voya Perspectives Series | Talking Points | May 11, 2017
- Merger and acquisition announcements took center stage in a loan market that had a good week but nonetheless remains eager for new paper. The S&P/LSTA Leveraged Loan Index (the “Index”) returned a solid 0.10%, and the average bid for loans increased by two bps, to 98.33.
- The expansion of M&A activity, which was more prevalent in April than the two months prior, was a welcome development for investors eager for transactions beyond the refinancing and repricing volume that resulted from the lagging supply of new paper earlier in the year. Announcements of these deals helped the forward calendar to pick up this week: net of the approximately $14.48 billion of anticipated repayments not associated with the forward calendar, the amount of net new supply expected to debut in market totals around $13.74 billion, which follows last week’s negative net new supply of $1.18 billion. While some of these deals are existing institutional loans that will be refinanced in connection with these transactions, the incremental new money is a positive addition to the market.
- Secondary market trading was quieter the past few days, but news on earnings resulted in volatile price movements for some individual issuers. Others used the opportunity to reveal future plans for their underlying businesses.
- Riskier loans were the best performers in a week that saw fine returns across the below-investment grade credit spectrum. CCCs gained 0.31%, and the average bid for the cohort jumped 55 bps, to 87.80. Single Bs returned 0.11%, and their 98.87 average bid was a five bps uptick. BBs gained 0.10%, and their average bid increased by three bps, to 100.39.
- Retail loan funds in the Lipper FMI universe enjoyed $238 million of inflows, while two CLOs priced this week, bringing May issuance to $2.8 billion, and 2017 YTD issuance to $30.4 billion.
- There were no defaults in the Index this week. The default rate by amount outstanding sits at 1.29%.
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 May 5, 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.
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