March 19, 2020 - The severity of the Coronavirus induced economic downturn struck the corporate loan market late last month. During the last five trading sessions of February, the S&P/LSTA Leveraged Loan Index (LLI) returned -1.54%, the largest such weekly decline since August 2011. Prices in the secondary would go on to fall 150 basis points that week, to 95.18. As a result, the Index lost 1.3% in February, the worst monthly decline since the 2.5% drop in December 2018. Through February, the Index was down 0.77%, despite gaining 0.56% in January. That was then and this is, unfortunately now.
Declines in the secondary loan market have been severe so far in March, particularly over the past two weeks. As managers sold loans to raise cash, trading volumes have hit record highs, price volatility has increased to record levels and bid-ask spreads have widened beyond 300 basis points. On Wednesday alone, the market’s average bid level fell 321 basis points, or 3.74% to an average bid of 81.4. While Wednesday saw the worst one-day price decline on record, the previous three record one-day declines occurred over the past seven trading sessions. Since the end of February, all loans have traded lower with 92% of price movements worse than 5%. And from a price distribution standpoint, the secondary market looks far different today than it did just three weeks ago. Today, no loans are trading above par and only 22% are above 90. The percentage of loans trading in a sub-70 context has doubled to 10%.
As of Wednesday’s close, month to date loan returns sit at -14.1%, with prices down 1,378 basis points since the end of February. To put that in perspective, the only time the loan market produced a double-digit negative monthly return was during the height of the financial crisis – loan returns were negative 13.2% in October 2008. Sandwiched around October 2008, were the second and third worst monthly prints on record: -6.2% in September and -8.5% in November. But obviously, these are unprecedented times for the markets today, with the Dow experiencing its worst monthly loss since 1987 and its worst weekly performance since 2008. Incredibly, the 10-year treasury rate “rallied” above 1% on Thursday while WTI crude traded higher into the mid-$20 range after experiencing its 3rd worst single day drop in its history. A U.S. recession is now the base case across the street despite the unprecedented moves by the Fed and other government agencies to contain the damage across Wall Street and Main Street alike.