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October: In Like a Lamb, Out Like a Lion

November 8, 2018 - Coming off a strong September, new issue institutional loan terms favored borrowers in the beginning of October. However, with rising volatility in the equity markets, terms turned more toward lenders in the latter part of the month. Here is how four stats defined October’s market.

Statistic One: Supply. With repricings and refinancings back on the table in the beginning of October, nominal lending volumes jumped. Both LCD and LevFinInsights (LFI) saw nominal institutional lending rebound into the mid-$60 billion context, up 15% and 80%, respectively. But with the jumbo LBOs of September wrapping up, net new lending less inspiring. LCD observed that buyout market share tumbled from 50% in September to 25% in October. In turn, LFI saw net volume flattish at $24.4 billion. (The S&P/LSTA Leveraged Loan Index did grow by $29 billion to $1.12 trillion, but this mostly reflected the entrance of September’s three mega deals in early October.)

Statistic Two: Demand. After enjoying inflows for most of this year, October saw a $600 million outflow from loan mutual funds. This both affected investor demand – particularly upon a $1.5 billion outflow in the last week of the month – as well as loan mutual fund AUM. Between softening loan prices and outflows, loan mutual fund AUM slid from $1.87 billion to $173.6 billion, observed Refinitiv. Conversely, CLO issuance climbed by $1 billion to $9.55 billion; still, this is nearly $1.5 billion shy of 2018’s monthly average issuance.

Statistic Three: Pricing. Flexes still favored borrowers (32 down vs. 14 up, according to LFI) for the month. But two caveats: First, the ratio improved from September (30 down, 7 up). Second, upward flex outpaced reverse flex the last week of October. Still, with strong early-month momentum, LCD calculated that B+/B contractual spreads contracted to LIB+352 in October, from LIB+386 in September.

Statistic Four: Defaults. After a spotless September, October ushered in a trifecta of fails. With the defaults of American Tire Distributors, Dixie Electric and Sears, the S&P/LSTA LLI default rate rebounded to 1.92% in October, up from 1.51% in September.

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