February: It Gets Better

March 8, 2018 - In January, demand was very strong, repricings surged and terms and conditions weakened substantially. While not fun, in February, it gets better: Amid a backdrop of equity market volatility. demand only slightly outpaced supply. Of course, a slight imbalance still is an imbalance, and terms still trended in borrowers’ favor. Below, we recap the highlights and link to deeper dives.

By almost any of the many loan market metrics, loan supply improved in February. According to LFI, “priced loan volume” – everything that could be tracked – climbed from $49 billion in January to $86 billion in February. By the more relevant “net new money” metric, supply doubled from $13.7 billion to $29 billion. Our preferred supply metric is the change in outstandings in the S&P/LSTA Leveraged Loan Index (LLI) because i) refinancings wash out and i) it captures paydowns as well as new loans.  Outstandings in the LLI increased by $15.7 billion in February to $980 billion. As of March 7th, it is up $29 billion (to a record $984 billion) this year.

But visible demand was up as well in March. S&P/LCD tracked $15 billion of new CLO issuance in February, up from $6.3 billion in January. Thomson Reuters LPC’s Leveraged Loan Monthly charts $970 million of loan mutual fund inflows, up from $730 million in January. Thus, February’s visible demand – roughly $16 billion – was marginally higher than the $15.7 billion of net LLI supply.

A better imbalance still is an imbalance, and terms still edged in borrowers’ favor. Repricing activity remained strong, with $47 billion sighted by LFI in February, up from $41 billion in January. Meanwhile, there were 38 reverse flexes and just eight upward ones, LFI adds.  And spreads remain tight. According to S&P/LCD, average B+/B TLB spreads were LIB+340, where they have been hovering for the past few months. But stronger BBs or five-B credits are going much lower: At least four companies have cleared at a LIB+175 price point.

But while spreads are going lower, thanks to a climb in LIBOR, “coupons” are not. Three month LIBOR has hit 2.02%, up from less than 1.7% at the beginning of the year. Thus, while the nominal spread on loans in the LLI has slipped from LIB+341 in December to LIB+338 in February, the effective yield of those same loans has increased from 4.86% to 5.06%.

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