Senior Loan Talking Points - Riding the Rate Wave
Voya Perspectives Series | Talking Points | March 16, 2017
- It was an eventful week for the U.S. loan market, with winter storm Stella battering the Eastern United States and slowing down primary activity, followed by a pick-up in launches and the Federal Reserve decision to raise short-term interest rates. The S&P/LSTA Leveraged Loan Index (the “Index”) declined slightly by 0.03%%, while the average bid for loans decreased by ten bps, to 98.49.
- Refinancing transactions accounted for upward of 82% of new issue deals, and the scarcity of new money remains a frustration for investors eager to put their cash to work. Net new supply, when netted from anticipated repayments unrelated to the forward calendar, declined from $6.61 billion to $2.30 billion. With the Fed now demonstrating a clearer mandate for hiking rates more regularly this year, and with early March as an indicator, demand is likely to remain robust.
- Three new issue CLOs priced this week. March so far has seen $4.29 billion of new and reset CLO issuance, which brings the YTD total to $13.8 billion. That figure nearly matches issuance over the first four months of 2016. However, lagging new issue supply, record repricing volume, and high loan prices remain a source of arbitrage pressure for CLO managers. Nonetheless, the mood in market is optimistic.
- Break prices in the secondary markets stayed relatively high, with several names breaking above par. Loan mutual funds in the Lipper FMI universe saw $646 million of inflows, and retail vehicles have now experienced inflows for 31 of the last 32 weeks.
- Distressed loans continued to trend downward, while higher quality name performed better. CCCs lost 0.24%, and their average bid decreased by 38 bps, to 86.61. Single Bs declined by 0.05%, and their average bid of 98.85 was 12 bps lower on the week. BBs gained 0.03%, though their average bid decreased by two bps, to 100.39.
- There were no defaults in the Index this week. The default rate by amount outstanding is 1.12%.
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 March 10, 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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