Senior Loan Talking Points - April 5, 2018

Jeffrey Bakalar

Jeffrey Bakalar

Group Head and Chief Investment Officer, Senior Loans

Dan Norman

Dan Norman

Group Head and Managing Director, Senior Loans

  • Once again standing firm against the volatility present in other markets, the S&P/LSTA Leveraged Loan Index (the “Index”) gained four bps during the week.
  • New issue volume continued to be relatively robust, with refinancings being the main driver, along with a welcomed slate of fresh M&A/LBO deals.
  • The visible forward calendar remains solid: when factoring out the $11.1 billion of expected repayments not associated with the forward calendar, net new supply poised to enter the market totals just under $33 billion, up from last week’s $19.2 billion.
  • Beyond that, however, the pipeline shows signs of slowing, which could impact market dynamics (i.e., secondary prices up, along with repricing activity, all things equal).
  • As Dodd-Frank Risk Retention requirements sunset on CLO managers, new issuance remains healthy. Four new vehicles prices this past week, bringing YTD issuance to $31.1 billion. Loan mutual funds marked another week of positive inflows, with $150 million moving into the Lipper FMI universe of funds.*
  • There were no defaults in the Index this week.
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*S&P/LCD estimate.
Source: S&P/LCD, S&P/LSTA Leveraged Loan Index and S&P Global Market Intelligence. Additional footnotes and disclosures on back page.  Past performance is no guarantee of future results. Investors cannot invest directly in the Index.

March

March represented a very busy month for the loan market as managers worked through nearly $45 billion in issuance and over 130 new allocations. The flurry of primary activity put pressure on the weighted average bid price, which moved down 11 bps in March, to 98.42. Nonetheless, the Index posted a respectable 0.28% gain, up slightly from February’s return of 0.20%. For the quarter, leveraged loans are up 1.45% in 2018, outperforming other asset classes, such as high yield bonds and equities (both in the red), by a notable margin.

With the primary market experiencing an uptick in issuance during March, the Index expanded by another $9.2 billion, to a new record of $994 billion for the asset class. Demand, on the other hand, moderated slightly from February levels. CLO issuance remained steady at $10.7 billion of total volume, nearly in line with the running 12-month average of $11 billion. Retail loan funds in the Lipper FMI universe recorded $2 billion of inflows to the space, the highest monthly reading since March of 2017.

Returns among below-investment grade rating cohorts reflected prevailing market conditions, as higher quality fared better. Double and single Bs both had respectable advances in March, returning 0.36% and 0.26%, respectively, while riskier loans fared the worst as evidenced by a flat 0.00% return for CCCs, and a notable -1.49% return for Defaulted credits.

The loan market experienced two defaults in the Index for the month as Clear Channel Communications and Harvey Gulf both filed for bankruptcy during the period. Consequently, the default rate by amount outstanding increased to 2.42%, which was largely contributed by the $6.3 billion default of iHeart Media (Clear Channel Communication), the fifth largest in the history of the Index.

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 30, 2018.

2 – Excludes facilities that are currently in default.

3 – Comprises all loans, including those not tracked in the 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 twelvemonth period.

 

General Risks for Floating Rate Senior Loans: Floating rate senior 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 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 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.

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Past performance is no guarantee of future results.

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