Investment Management

Senior Loan Talking Points - LBOs Lead The Way

Voya Perspectives Series | Talking Points | July 13, 2017

  • Activity across the U.S. loan market picked up after the Fourth of July holiday, with a spate of new money transactions dominated by LBO deals. The S&P/LSTA Leveraged Loan Index (the “Index”) performed solidly, returning 0.13% on the week. The average bid added two bps, to 98.07.
  • New deals debuting in market included a sizeable amount of leveraged buyout paper, which at $5.1 billion in volume so far in July, is comparing favorably to May and June’s full month figures of $6.1 billion and $8.7 billion. Prospects for a busier forward calendar are increasing as, net of all anticipated repayments, the amount of net new supply poised to hit the market is approximately $18 billion, versus net new supply of $4.4 billion the previous week. Of course, timing is the question; most of this activity is likely to surface closer to the U.S. Labor Day holiday.
  • The secondary market was active and performed, on average, with strength. Due to the high volume of recent repayments, significant amounts of money made its way back into the market, and investors put that cash to work. Solidifying bids were a welcome change as compared to late June’s relative softness.
  • Returns were mixed for loans in the below-investment grade spectrum, with higher quality cohorts outperforming riskier lower ratings. BBs and Single Bs each gained 0.15%, and their respective average bids of 99.92 and 98.86 were each up five bps. The average CCC – always the most idiosyncratic of the categories – lost 0.12%, as their average bid fell by two bps, to 85.00.
  • Three CLOs closed this week, which brings July issuance to $1.8 billion and YTD issuance to $54.2 billion. Retail loan funds experienced outflows of $676 million (Lipper FMI universe).
  • There were no defaults in the Index this week. The default rate by amount outstanding currently stands at 1.36%.

    July 13

    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 July 7, 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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