June 22, 2017 - It has been a cool start to summer for issuers.  The secondary market continued to soften, several loan and HY bond deals have been pulled, and several others have seen terms move in favor of investors. That said, it’s a little early to suggest the market is turning away from issuers. Moreover, in recent months we seen several instances when technicals turned (briefly) in favor of investors, only to return to their issuer-friendly ways in a matter of days. Only time will tell whether the summer solstice ushered in a more permanent shift.

What we can see: Secondary loan prices, which have bounced between the low- and mid-98s this year, have been slipping this month. At 98.04 as of Wednesday, the average price in the S&P/LSTA Leveraged Loan Index is down 30 bps from its late-May levels. To be fair, some of the decline comes courtesy of Oil & Gas (which is facing up to a supply glut) and Retail (which had led the LLI marginally higher in May), LCD wrote in Wednesday’s loan fund AUM analysis.

The secondary pressure on loans – particularly those with low coupons – may empower investors to push back on aggressive terms or opportunistic issuers in the primary, LevFinInsights wrote Wednesday. Cases in point: First, ADT extended the 101 call protection on its repricings to 12 months. This could, theoretically, slow the procession of frequent repricers. Second, Energy Futures Intermediate Holdings sweetened pricing on its DIP. Meanwhile, on Wednesday, serial repricer Berry Plastics pulled its repricing (which would have been its third in one year); it was followed by Virgin Media on Thursday.

Thanks to a softer secondary and somewhat better technicals, investors might also be becoming more disciplined as regards new issue loan spreads – and downward spread pressure has abated (somewhat), TR-LPC wrote. Still, a few caveats are in order. First, any supply-demand balance could quickly evaporate if CLO formation accelerates or loan mutual fund inflows strengthen again. Second, any loan market balance comes after more than 12 months of everything moving in issuers’ favor.

Indeed, the shift from headwinds to tailwinds in the loan market was a theme of a presentation given yesterday by LSTA’s EVP-Research Meredith Coffey. To wit, 18 months ago everything was moving against issuers. Fundamentals were deteriorating, thanks to the evisceration of the oil & gas sector. With CLO issuance nil and loan mutual funds suffering outflows, visible demand actually rannegative in January 2016. And with expectations of a continuing Democratic administration, regulation was presumed to continue tightening. Fast forward to 2017: Strongly positive technicals, recovering fundamentals and potential regulatory rollback all have been buoying the loan market. To be fair, the shine might have come off fundamentals a bit in recent weeks and technicals might be more balanced than they have been in a year. However, potential regulatory fixes – most recently illustrated by the Treasury’s first Financial Regulatory Reform report – remains a positive for the future of the loan market.