February 6, 2020 - Coming off a strong finish to 2019 where the S&P/LSTA Leveraged Loan Index (LLI) produced an eight-month best 1.1% return, the loan market began 2020 right where it left off – on fire. Through the first three weeks of the new year, prices in the secondary rallied more than 60 basis points as the lower-end of the market continued to catch a strong bid. But during the last several trading sessions of January, prices pulled back amid the growing concerns regarding the coronavirus. While the market gave back a majority of its gains, bid levels still tacked on an average of 23 basis points across the month (the average bid level ended January at 96.95). All told, January returns totaled 0.56% behind the strength of single B loans, mostly notably those rated B-, which rallied 56 basis points in secondary. Loan returns have now been positive for the third month running. But January’s advancer/decliner ratio came in at a three-month worst 1.3:1 as 50% of loan prices advanced and 39% declined. That said, January’s biggest price movers favored the upside with 18% of loans reporting gains of 1% or better compared to just 7% of loans reporting losses of 1% or worse.
January offered up several other noteworthy storylines, some good and some not so good. Good news first – After 15 consecutive months of outflows totaling more than $50 billion, Loan Mutual funds reported inflows in the range of $150 million in January. Market insiders suggest that this could be the beginning of a relative value play where loans continue to trade cheap to bonds. On the CLO slide, issuance sank to a two year low of just $4.1 billion. While liabilities appear to be tightening, creating the appropriate level of arbitrage for new issues to work is getting harder by the day- a point we’ll get to in a minute. Turing to supply, the LLI shrank in size for the second month running, ending January down $5 billion, thus leaving the market with an advantageous $9.3 billion supply shortage, according to S&P/LCD. Now to the not so good, that is unless you’re an issuer, of course. Borrowers enjoyed their best month in three years in terms of repricings as the percentage of loans trading north of par remained high at a 35% market share. And while late 2019 was defined by a flight to quality trade in the BB space, single-B (B+/B) rated borrowers entered the fray in January as refinancing activity spiked to near record highs and new issue spreads fell to post-recession lows. In total, refinancing activity hit $97 billion, a figure that included almost $54 billion in single-B repricings.