July 27, 2021 - According to the LSTA’s Second Quarter Trade Data Study LSTA’s Second Quarter Trade Data Study , 2Q21 secondary trading volume fell 3% to $202.4B. But 1Q21 was a hard comp to beat; at $209B, it was the second busiest quarter on record (1Q20’s pandemic fueled $249.5B remains the high-water mark). On average, the market traded $69B per month in 2021, with June coming in just north of that figure at 69.4B, a 9% increase over May. Across the first six months of 2021, trade activity totaled a robust $412B. At this current run rate, 2021 would be the most active year ever in the secondary at $824B, and 7% higher than 2020’s standing record of $772B. On an annualized basis, the market’s 1H21 turnover ratio – which is defined as total trade volume divided by average S&P/LSTA Leveraged Loan Index (LLI) outstandings – hit 70%. In comparison, the ratio dipped below 70% during both full year 2019 and 2020 (at 63% and 65% respectively). This year’s five percentage-point gain in turnover ratio is even more noteworthy considering that the LLI tacked on more than $65B in new loans this year (almost $47B in May and June alone), the strongest growth spurt in years. In turn, a record average number of loans, 1,536 to be exact, traded monthly across the second quarter. This figure, which is an indicator of market breadth, becomes even more meaningful because, despite the increase in index outstandings this year, the number of loans in the index has fallen by eight facilities, to 1,442.
March 2020’s record sell-off in the secondary market is a distant memory as we enter the second half of 2021. After rallying back to pre-pandemic levels during 4Q20, prices in the secondary have been inching their way back to all-time highs, as both technical and fundamental conditions support the secondary’s march back to par. In June, the median trade level increased 14 basis points to 99.9 after running flat at 99.75 since the end of 1Q21. At the same time, the median mark-to-market bid-ask spread on the traded universe of loans tightened four basis points in June to 44 basis points. In comparison, the secondary market started the year trading at a median price of 99 and a bid-ask spread of 75 basis points. (For a historical comp, in the heyday of 2007, the median trade price peaked at 100.88 while the all-time tight bid-ask spread was reported at 38 basis points.) Even as recent concerns regarding inflation, inflated asset valuations and the delta variant could combine to derail the broader markets during the second half of 2021, the loan market seems poised to tack on additional gains. So far this year (through June), index returns totaled 3.25%, as lower rated credits have outperformed – CCC’s returned 9.8% while single-B returns (3.12%) were almost double that of double-Bs. This may not be surprising given that loans within the LLI have sported a higher rate of upgrades than downgrades since the start of the year. Furthermore, after standing at 4.5% in December 2020, Fitch is currently forecasting a loan default rate of just 1.5% for the remainder of the year. And then there is the sizeable uptick in visible flows into the asset class which have grossly outstripped the LLI’s $65B increase in loans outstanding this year. To that point, June marked the 7th consecutive month of positive flows into loan mutual funds and ETFs. Since the beginning of the year, fund flows have totaled $19.7B as AUM has risen to a two-year high of $121B. Even more impressive, a record $81B of new CLOs have come online this year, lifting CLO AUM to $794B. Given these stats, it is surprising that “only” 29% of the secondary traded above par during June. And in case you were wondering; that figure stood at 85% at one point back in 2007.