Senior Loan Talking Points - June 7, 2018

Jeffrey Bakalar

Jeffrey Bakalar

Group Head and Chief Investment Officer, Senior Loans

Dan Norman

Dan Norman

Group Head and Managing Director, Senior Loans

  • The S&P/LSTA Leveraged Loan Index (the “Index”) returned 0.18% for the week, while the average bid for the asset class moved up 9 basis points (bps).
  • M&A transactions continued their surge in the primary market with over $8.6 billion issued for the week, accounting for 75% of all new issue volume. The forward calendar remained in high gear: net of the approximately $14.8 billion of anticipated repayments that aren’t associated with the forward calendar, the amount of net new supply poised to hit the market totals about $22.8 billion, versus net new supply of $24.8 billion last week.
  • Traders reported a firmer tone in the secondary market. Correspondingly, the average bid of LCD’s flow name composite gained six bps over the week, finishing at 99.53% of par.
  • Four new CLOs were issued this week, bringing YTD totals to a respectable $56.4 billion. Retail loan funds continued to experience inflows, totaling $155 million for the five business days ended June 6 (Lipper FMI universe*).
  • 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.

May

A busy primary market put some downward pressure on loan prices as the average bid for the asset class fell by 22 bps, to 98.35. Consequently, the loan market gained a modest 0.17% in May, off the pace of the 0.36% average over the last 12 months. Nonetheless, senior loans have returned 2.04% for the year, slightly ahead of other asset classes such as equities (2.02%), and notably outperforming high-yield bonds (-0.27%) and 10-year Treasuries (-2.67%), which both continue to be in the red.

The welcome infusion of new institutional loan paper increased in May, supported by continued M&A activity and LBO transactions. Roughly $66 billion of credits were launched into syndication last month, the most since January 2017. As a result, the par amount outstanding tracked by the S&P/LSTA Loan Index grew by $21 billion, bringing the Index to $1.03 trillion, a new record for the asset class.

On the other side of the ledger, visible demand remained positive. CLO managers priced $11.2 billion of new vehicles in May, up slightly from roughly $10.8 billion in each April and March, and in-line with the running 12-month average of $11.1 billion. U.S. retail loan funds have recorded inflows for 15 straight weeks, totaling $6.5 billion, based on Lipper weekly reporters. For the month, LCD estimates $3.7 billion of inflows from retail loan investors.

Monthly performance among below-investment grade rating cohorts reflected a sharp snap-back to risk-on sentiment, following April’s negative returns for the riskiest parts of the market. CCCs and Defaulted loans returned 1.14% and 1.03%, respectively. Meanwhile, single Bs returned 0.16%, while BBs were relatively flat with just a two bps advance.

Despite the Index experiencing one default during May (Proserv Group; Oil & Gas sector), the default rate decreased for a second consecutive month, both by amount outstanding and issuer count, closing out the period at 2.12% and 1.72%, respectively.

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 1, 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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