Senior Loan Talking Points - A Little R(est) and R(ecovery)
Voya Perspectives Series | Talking Points | July 6, 2017
- With a shortened holiday week and seasonally slower primary market activity, secondary prices received a bit of a boost, resulting in a 0.12% weekly return for the S&P/LSTA Leveraged Loan Index (“Index”). After losing a little altitude during most of June (related largely to repricing activity), the average Index bid moved up for the second week in a row, this time by three basis points, to close at 98.05.
- After a flurry of activity in June, primary market volume was down this week, as U.S. arrangers and investors enjoyed the long Independence Day holiday weekend. The amount of new supply on the forward calendar, net of all expected repayments, declined substantially, to $4.4 billion from $23.2 billion last week. At this point, there appears to be no visible indication of a meaningful pickup in supply until we move closer to the end of summer. While a bit of a yellow flag in that a dearth of new paper has the potential to exacerbate what has been an uneven market technical, it appears as though the reduction in imminent new deal flow is nicely coinciding with a similar moderation in overall inflows into the asset class.
- Following a couple of weeks of retail fund outflows, reported flows in that segment of the investor base were back in the black, though modestly, at $50 million for the week (per Lipper weekly reporters only). CLOs remained the busy bees of the asset class, although an increasing portion of activity within this part of the market is refinancing and “reset” activity. Six CLOs were issued during the week, raising the YTD total to nearly $53 billion.
- Returns were reasonably even across ratings cohorts this week: single Bs led at 0.14%, followed by CCCs and BBs, which each posted a 0.10% return.
- There were no defaults in the Index this week. The default rate by amount outstanding currently stands at 1.36%.
June in Review
The loan market’s 15-month streak of positive returns was halted by a -0.04% total return for the Index in June. Interest carry was unable to fully offset a softening of market values, as loan prices faced a little headwind on multiple fronts. The (hopefully) tail end of repricing activity continued to modestly deflate average bid prices (obviously concentrated in the higher-quality, performing part of the market), as did some selling to make room for newly allocated primary issuance. Adding additional weight on average prices was returning pressure on the Oil & Gas and Retail sectors. All told, the combination of these factors drove a -0.43% market value return for June. The weighted average bid of the Index ended the month six bps below the December 31, 2016 level of 98.08.
If May was a month of equilibrium in market technicals, June tilted the scales again – this time in favor of investors – as a wave of new supply hit the market, outpacing demand for the first time in 15 months. LCD estimates $215 million of inflows from retail loan investors for the month, while CLO issuance increased to a 27-month high of $13.7 billion. Meanwhile, Index par outstandings increased by $34 billion to a new record of $943 billion, supported by continued M&A activity of around $22 billion, a decline in repayments to $21.5 billion (an 11-month low), and an ebb in refinancing activity (just under $11 billion). Looking at the full picture, LCD’s proxy calculation for surplus (net change in Index outstandings less fund flows and CLO issuance) shows excess supply vs. demand of $20 billion for June. For reference, the average monthly shortage over the last 15 months was $6 billion.
As mentioned, Oil & Gas and Retail faced renewed pressure in June, with returns of -3.92% and -1.49%, respectively. In fact, nine of the top 10 Index decliners were in these two sectors. Given the sector-related challenges and the increase in primary market activity, the riskiest loans fared the worst over the month as evidenced by a -1.46% for CCCs.
There were two defaults in the Index during the month. As a result, the Index’s default rate by amount outstanding increased to 1.54% by month’s end versus 1.42% in May.
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 June 30, 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.
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