October 24, 2019 - After recording a record high during the first quarter of this year ($212 billion), secondary loan trading volumes have steadily declined. Following second quarter’s 10% drop, third quarter activity fell an additional 14% to $165 billion. Third quarter’s tally was just 2% higher year-over-year. Furthermore, volumes really tapered off during August and September when activity remained below $55 billion per month – the last time that occurred was back in March and April of last year. In taking a closer look at this year’s activity, volumes have mostly been affected by a drop-off in market depth (trade frequency) as opposed to weaker breadth (loan count). While the number of loans traded per month has remained stubbornly constant at 1,500, trade frequency has steadily declined. For example, back in the first quarter, a record 56% of loans traded in excess of 20 times per month, on average, while just 28% of loans traded less than 10 times per month. Fast forward to the third quarter, those figures came in at 49% and 35%, respectively.
While the S&P/LSTA Leveraged Loan Index sported a positive third quarter return of 1%, market value losses totaled -0.5% as the average trade price ended the quarter down almost 100 basis points (to 96.2). Interestingly, the average hadn’t been reported that low since the summer of 2016 (full disclosure – the average trade price sank to 96.3 last December). But while the average price fell to a multi-year low in September, the median trade price held steady above a 99 context for the six month running. In comparison, the median was 175 basis points lower back in December. So what does this illustrate about today’s market in contrast to last December? First off, December’s swoon was mostly an end of year liquidity event where a record $17 billion exited loan mutual funds and loan prices fell indiscriminately. In contrast, today’s price action in the secondary has been driven by credit concerns and a subsequent flight to quality trade. For instance, back in December, the percentage of loans trading at or above par fell to less than a 1% market share as compared to September’s 34% share which was dominated by higher quality loans. Another interesting point that illustrates the bifurcation that is occurring in today’s secondary market is the price gap between the average and median trade price – which widened 190 basis points to 300 basis points since year end. Back in December, “sub-90” volumes accounted for just 7% of trade activity, whereas market share increased to 15% in September (from 9% in August). Not too surprising, given that the market’s rolling 3-month downgrade ratio increased to a multi-year high of 4.9:1 in September, according to S&P Global Market Intelligence. But that said, dire credit issues remain contained to just a small portion of the market as the default rate by dollar amount (1.3%) and count (1.6%) are actually lower on the year. Furthermore, the percentage of loans residing in the S&P/LSTA Leveraged Loan Index rated CCC remains inside 6% while just 4% are trading at a price below 80.