May 20, 2020 - As loan prices continued to recover in April from their COVID-19 lows of late March, LSTA monthly secondary loan trading volume normalized around its pre-March high. April loan trading activity totaled $75.2B, off 37% from March’s record $119.3B, but near the previous high of $76B in January 2018. Furthermore, April trade volumes represented a substantial 24% rise over the last-twelve-month (prior to March 2020) average of $60.8B. But despite the increased trade activity of the past two months, market breadth, or the number of individual loans trading each month has steadily declined. In January and February, the average number of loans traded each month totaled 1,500, but that number fell to 1,450 in March and 1,350 in April. The last time monthly market breadth was below 1,400 loans was in September 2017, when trading volume sat in a sub-$50B range.
On the performance front, the median trade price increased 100 basis points in April, to a 92 handle, but the average trade price was relatively flat at 88.7. At the same time, the median and average LSTA/Refinitiv Mark-to-Market bid-ask spreads (on the traded universe of loans) widened out marginally to 250 and 270 basis points, respectively. At first glance, these figures don’t appear to reflect the April rally that produced an S&P/LSTA Leveraged Loan Index return of 4.5% on an advancer/decliner ratio of 4:1. In taking a closer look at the data, there were two reasons for the discrepancy. First, April volumes were much larger during the first two weeks of the month. At that time, prices were rallying 200 basis points to a low 88 range while bid-ask spreads were remaining stubbornly wide in a 300 basis point context. But during April’s more lightly traded second half, trading levels rallied by roughly another 100 basis points, to an average price north of 89. At the same time, bid-ask spreads finally began to meaningfully tighten, ending the month in a low 200 basis point range. Second, there was a sizeable shift in trade activity to lower rated loans in April as cross-over investors chased yield and CLOs shed credit risk. (Ann estimated 30% of CLO collateral experienced negative rating actions in just two months.) As an example of the shift in trade activity, loans rated below B+ (which sport lower prices and wider spreads) increased their market share of total trade activity by eleven percentage points in April. Loans rated CCC+ tallied the largest percentage increase (5%) in market share followed by B- rated loans at a 3% increase. Conversely, loans rated BB- witnessed a 3% decline in their share of total April trading activity. That all said, the lower rated segment of the market clearly outperformed in April. As a result, the large price gaps between the haves and have nots tightened meaningfully in April, thus compelling traditional loan managers to rotate back up into quality in May.