October 22, 2020 - LSTA secondary loan trading volume increased 19% in September, to a three-month high $57B; this stands in contrast to August’s reading, which came in at a 33-month low.  September’s uptick was closely tied to a number of factors.  First, CLO issuance ran above $10B for the first time in a year.  Second, institutional loan volume soared past $40B for the first time since January, with September’s total coming in at not only an 8-month high, but also $13B higher than the previous two months combined.   In turn, the number of loans traded, or market breadth, increased 8% to an 8-month high of 1,500 loans.  But despite the increase in September trading activity, third quarter volume fell 23% to just $156.2B – the market’s first sub-$160B quarter since fourth quarter 2017.  Even so, over the last twelve months (LTM), trading volumes increased to a fresh record $781B – 5% higher than 2019’s full year total. (Full disclosure: March 2020’s record $119B in activity represented 15% of the LTM figure and was greater than any two months combined from June through September.) 

While aggregate trading volumes have declined for the better part of the past six months, distressed trading activity has surged.  This is hardly surprising, given that the default rate has more than doubled to 4.3% since the end of the first quarter, according to Fitch, who is forecasting the rate to rise further to 7-8% in 2021.  Since the end of the March, quarterly distressed volumes have increased 29% to $9.5B or 6% of total activity.   The last time either figure was that high was in the first quarter of 2017 (when the default rate was falling back below 1.5% after the energy crisis of 2016 that drove the oil/gas sector default rate to 30%). 

While trading volumes tapered off this summer, the rally remained well intact as trade prices increased to seven-month highs. Strong market breadth drove performance across most of the third quarter as the secondary’s monthly advancer/decliner ratio averaged 4.3:1.  While the ratio did soften in September to just 1.8:1, the average and median trade prices still tacked on 100 bps and 50 bps gains in September, respectively.  Across the entire quarter, the average trade price increased 320 bps, to a 96-handle, while the median trade price increased 225 basis points to 98.5.  Since the market’s March low, the average and median trade price levels are up more than 700 bps but remain roughly 150 bps off their pre-COVID-19 highs.  And as prices continued to improve across the secondary, LSTA/Refinitiv Mark-to-Market bid-ask spreads on traded loans continued to tighten.  The median bid-ask spread narrowed another 40 bps, to 88 bps, during the third quarter, while the average bid-ask spread tightened 53 basis points, to 107 bps.  Both figures remain less than 30 bps wider than their February tights. 

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Market Advisory on FIRPTA

The LSTA published a Market Advisory which discusses the implications of The Foreign Investment in Real Property Tax Act (“FIRPTA”).