March 26, 2020 - Finally, the markets have seemed to found a bottom, or at least a temporary reprieve from the record setting declines witnessed over the past two weeks. And it appears we have the government to thank. While markets moved higher in anticipation on Tuesday, the White House and Senate leaders finally reached a deal early Wednesday on a massive $2 trillion relief bill to combat the economic destruction of the coronavirus outbreak. The impact of the announcement had an immediate impact on the markets as risk assets, from equities to bank loans, staged historic rallies. In the loan market, the S&P/LSTA Leveraged Loan Index (LLI) reported a 2.04% market value return on Wednesday while the LLI 100 reported a staggering 4.63% market value gain. And markets continued to trade substantially higher through Thursday. But despite the gains of the past few days, the damage to returns across asset classes has been severe. The S&P 500 for instance, was down 16% in March and 23% YTD, through Wednesday’s close. Having lagged the equity bounce, the leveraged credit markets have underperformed equities in March, but still hold a sizeable lead since year-end. Loan and high-yield bond returns have generally moved in unison during the March downturn, at -17.66 and -17.05%, respectively. But following the record setting Wednesday price rally in the loan market, YTD loan returns (-18.29%) are now slightly ahead of high yield bond returns. In loan land, Tuesday marked the first positive close, albeit at just 12 bps, since March 13th, a span of six trading sessions that saw prices decline by more than 12 points. But prices went on to gain almost 1.5 points on Wednesday and are on target to see even better gains on Thursday. Since Monday’s close, price gains have been broad based, but to no surprise, a flight to quality and liquidity has ensued. Clearly, lenders are favoring stronger double-B credits and loans of substantive size, but this week’s latest price action has also included rallies in beaten-down high-beta names, a must for the broader market to truly turn the corner. Furthermore, analysis provided by LevFinInsights illustrated a clear lender bias for single-B names in stronger sectors with higher document scores. To that point, loans with documents containing the strongest protections are trading at roughly a four point premium to loans with the weakest protections. And as the rating agencies continue to downgrade loans in the near future and default rates subsequently rise, that trend may become even more pronounced.
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