2Q18 Secondary Trading Recap: Records are Made Amidst the Volatility

July 26, 2018 - According to the LSTA’s recent Trade Data Study, U.S. secondary loan trading volume increased 12% during the second quarter to a record $183 billion.  The quarter ended much busier than it began as volumes spiked 20% in May and another 4% in June.  May’s $64 billion tally was then a 15-month best, while June’s $66.4 billion came in as the second busiest month on record.  Additionally, as monthly volumes approached record highs, the number of loans traded during May and again in June shot past 1,500 for the first time ever.  And even though prices softened during the second quarter, the median mark-to-market bid-ask spread on the traded universe of loans was range bound at just 50 basis points.  More to that point, the important take away for the second quarter was that despite the fact the market delivered its worst performance in more than two years (Index returns totaled just 0.7%), liquidity measures not only held up well, they broke some records.

The sharp rise in second quarter activity was linked to the $55 billion surge in S&P/LSTA Leveraged Loan Index (LLI) Outstandings, which now sit at a record north of $1.05 Trillion.  And despite visible demand levels remaining very robust (loan mutual fund flows totaled $8 billion/CLO issuance totaled $37 billion), the loan market experienced a shift in technicals during the latter half of the quarter.  In total, supply outpaced demand by roughly $10 billion which culminated in the market’s first supply surplus since second quarter 2017.  In turn, prices in the secondary market began to weaken in May and by the end of the quarter the median trade price fell 25 basis points to 100 – an eight month low. Furthermore, as market breadth became decisively negative in June (decliners outpaced advancers by a ratio of 4.2:1), the average trade price dipped to a 98 handle- its lowest level on the year.  Hardest hit were lower-yielding loans that were trading at a premium to par which saw their market share fall from 66% in April to just 30% in June.  That said, the par-plus side of the market remained extremely active across the quarter and registered a 54% share of overall trading volume - just 11 percentage points lower than the previous quarter.

Despite the massive uptick in primary and secondary activity during the second quarter, par settlement times remained at the lower end of their post change in delayed compensation range which covers the previous 22 months.  Across the quarter, the median time to settle increased one day to T+12 while the average settlement time fell below T+18 for the first time since fourth quarter 2016.  During June, 45% of par loan trades settled within T+7, an increase of three percentage points over April.  Over the same time period, the percentage of par loan trades settled within T+7 improved two percentage points to 28%.  While both distributions are below their 22-month highs registered back in March, they both have illustrated improvement across 2018.

LSTA Full and Associate Members can access the full Summary, including charts, here. For more information, please contact Ted Basta.

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