April 30, 2019 - After hitting a record $210 billion in fourth quarter 2018, secondary loan trading volume increased 1% during the first quarter, to a fresh high north of $212 billion.  Trade activity increased year over year by an impressive 29% while S&P/LSTA Leveraged Loan Index outstanding grew by just 19%.  Volumes though, tapered off across the quarter (as did the price rally), following January’s record $76 billion in activity.  That said, the loan market’s first quarter turn-over ratio hit 73% (on an annualized basis), up 3 percentage points from the 70% figure reported over the past three years.

Going back to last October, when the secondary market began to sell-off, the number of individual loans traded on a monthly basis averaged more than 1,500 loans per month.  Furthermore, 55% of loans traded 20 times per month or more – a post credit crisis high.  Finally, daily trading volumes in 2019 averaged $3.5 billion per day; a 10% improvement over the last twelve month (LTM) period.  As important, the average number of individual loans traded each day climbed to 575 loans (up 6% over the LTM figure).  Liquidity levels, clearly, have picked up alongside higher volatility levels.

While liquidity surged in the first quarter, the over-sold secondary finally caught a strong bid market-wide, particularly in January when the S&P/LSTA Leveraged Loan Index (LLI) returned an impressive 2.55%.  The rally continued through most of February but fizzled out in March as LLI returns once again turned negative, albeit slightly at -0.17%.  Across the quarter, the median trade price rallied 163 basis points to a five month high of 99, as the average trade price increased 82 basis points, to 97.11. (Both figures remain 100 and 160 basis points lower than their pre-November highs, respectively.)  And as prices ran higher, mark-to-market bid ask spreads tightened accordingly.  Since year-end, the median bid-ask spread came in 24 bps to 66 bps, as the average spread tightened 21 bps, to 77 bps. (Both figures remain 20 basis points wider than their pre-November lows.)  But despite the first quarter rally, just 5% of trading volume was executed at a price point above par – a far cry from last year’s first quarter reading of 61%.  At the other end of the price spectrum, volume on loans trading in a sub-90 price context almost tripled in the first quarter to an 11% market share.  This increase is further illustrated by the rapid rise in distressed trading volume; where activity spiked 138% in the first quarter to a two year high $8.6 billion.  Still, distressed volumes constituted just 4% of total first quarter activity.

Full and associate LSTA members can access the full summary here and the 1st Quarter LSTA Trade & Settlement Data Study here. For more information, please contact Ted Basta.

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