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Secondary Market Recap: August Dog Days

September 7, 2017 - For the second time in three months, S&P/LSTA Leveraged Loan Index (LLI) total returns were negative, albeit modestly, at -0.04% for both June and August.   Unlike June, where a technical dislocation ended the market’s 15-month positive return streak, geopolitical (and meteorological) tensions dominated the August headlines.  For the first time this year, the markets became extremely volatile.  As hostilities increased between the U.S. and North Korea, the VIX spiked above 15 mid-month to reach its highest since May.  At the same time, S&P LCD’s Loan Volatility Metric (LVM) jumped past 10% for the first time this year.   As a result, investors shed risk and flocked to safe-haven assets. In turn, high grade bonds returned 0.85% while 10-year Treasuries returned 1.6%.  

Digging a bit deeper into August loan returns, Market-Value (MV) losses came in at negative 0.45% - a 20-month low.  August marked the fourth time this year were MV returns were negative.  All told, LSTA/TRLPC Mark-to-Market (MTM) prices in the secondary fell 38 basis points to an average bid of 97.92 – the lowest level reported since December.  And as prices declined, MTM bid-ask spreads widened above 80 basis points for the first time since April.  August’s pull-back in the secondary was widespread as decliners outpaced advancers at a 3.5:1 clip.  66% of loans reported MTM losses with just 19% reporting gains – almost an exact reversal from July where those figures were 18% and 65%, respectively.  And while the majority of price declines were muted, 9% of MTM losses topped 1%.  Hardest hit were loans that were priced above par, which saw their market share fall to 56% after swelling to a multi-year high of 63% during July.  On the industry front, the market’s weakest sectors once again led the laggards.  As the price of oil retreated from above $50 a barrel, mainly due to Hurricane Harvey, the oil and gas sector returned negative 2%.  Meanwhile retail (both food/drug and other) returned negative 1.8% and 1.2%, respectively. In total, the broader loan market has now returned 2.57% on the year– slightly behind most estimates for a coupon clipping year. 

LSTA Full and Associate Members can access the full Summary, including charts, here (located under Secondary Market Monthly).  For more information, please contact Ted Basta.

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