June 18, 2020 - LSTA monthly secondary loan trading volume fell to a five-month low in May as prices continued to run higher during month two of the rally.  May loan trading volume totaled $61.2B, off 19% from April’s $75.2B, but slightly above the LTM average of $60.8B (excluding March’s record $119.3B).  From a price distribution standpoint, sub-90 trading activity contracted six percentage points to a 37% market share; conversely, the 98 and above cohort reported a four-percentage point increase, to 13%.  The belly of the trading market (50%) remained in a 90 to 98 price range.  Meanwhile, loans trading on LSTA Distressed docs (“distressed”) soared 84% in May to $2.5B or 4.1% of total trade activity.   In March and April, distressed trading market share totaled just 1.2% and 1.8%, respectively.  The increase in distressed volumes is not surprising given the default rate swelled to 3.14% in May, a steady increase over March’s 1.84% and April’s 2.32% default figures, according to the S&P/LSTA Leveraged Loan Index .  And as the default rate has risen, so has the number of distressed shift dates issued by the LSTA.  In the last two and a half months, the LSTA has published shift dates on 22 credit agreements as compared to just 7 across the first quarter.

On to the May price rally, where the median trade price increased 100 basis points for the second month running and ultimately climbed to a 93 handle.  At the same time, the average trade price improved 75 basis points into a mid-89 range.  That said, both figures remain 7% to 8% off their LTM highs established in February.  And as lenders were more willing to take on risk in May, lower rated loans were the big winners.  The B- rated segment of the market traded higher by 150 bps to an average trade price of 86.2, while loans rated in the CCC range saw their average trade price increase 500 basis points to the mid-70s.  And while prices continued to improve across most of the market in May (indeed, advancers outpaced decliners at a ratio of 6.8:1), LSTA/Refinitiv Mark-to-Market bid-ask spreads on traded loans tightened meaningfully.  The median bid-ask spread tightened 75 basis points to 175 bps by the end of May, while the average bid-ask spread came in 70 basis points to 200 bps.  Even still, both figures remain roughly 115 basis points wider than their February tights.  Furthermore, today’s bid-ask spread levels are generally wider than historically observed (given where the market is trading), a fact that underpins the level of volatility and uncertainty inherent in today’s markets.

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