January 25, 2022 - Despite several COVID-induced fits and starts during 4Q21, the secondary loan trading market finished the year on very solid footing. Across the quarter, LSTA secondary loan trading volume increased 10%, to $193.3B, despite a seasonal decline in December activity (volumes fell 29% to a 12-month low of just $51.3B). According to the LSTA’s most recent Trade Data Study, this fourth-quarter volume surge raised full-year trading volume to a record $780B – a 1% increase over last year’s $772B. Monthly market breadth levels, or the number of distinct loans traded, also expanded to record levels. On average, 1,536 loans traded monthly across 2021, with that number expanding to 1,600 loans during 4Q21; all told we enjoyed a 10% rise over full-year 2020.
Driving secondary volumes higher in 2021 was a substantial expansion in the amount of loans outstanding which increased $148B, or 12%, to $1.34T, according to the S&P/LSTA Leveraged Loan Index (LLI). In turn, the loan market’s turnover ratio (annual secondary trading volume divided by average LLI outstandings) fell two percentage points to 62%. The dip though, wasn’t too surprising for two reasons. First, many portfolio managers focused much of their efforts on the primary, where an unprecedented $331B in M&A paper hit the market in 2021. Second, traders generally concentrated on accumulating loans, not necessarily trading them, as asset managers grew AUM and looked to invest a massive amount of new dollars in the market. In total, visible demand levels approached $235B as CLO issuance hit a record $187B while Loan Mutual fund/ETF inflows added $47.5B to the total. Therefore, it made perfect sense that traders bid up the secondary in 2021, albeit at a much greater degree earlier in the year. To that point, just 15% of December loan trades transacted at a price point above par, roughly half the figure reported at the end of the third quarter. (That trend though, according to traders, changed swiftly in the new year, with par-plus market share more than doubling over the first three weeks of January.) Across 2021, monthly secondary trading levels increased more than 150 basis points to end the year at an average trade price of 99. The last time the secondary was bid that strongly was way back in mid-2014. At the same time, the median trade level ended the year at 99.75, or just 25 basis points shy of par. As price levels ran higher across most of 2021, LSTA/Refinitiv mark-to-market bid-ask spread levels, on the traded universe of loans, ended the year at multi-year tights. The average spread tightened a whopping 35 basis points over the past 12 months, to 55 basis points, while the median spread came in at 47 basis points.
For more information on the secondary, please contact Ted Basta.