June 17, 2021 - by Ted Basta. LSTA secondary loan trading volume dipped 8% in May to a five-month low $63.8B. While May represented the second month in a row where volumes declined, the March ’21 comp was somewhat of an outlier at $75.3B. And, even with a decline, last month’s trading activity came in 5% higher than the LTM average of $60.7B. So far in 2021, secondary trading volume is tracking to an all-time high, although annualizing just five months of data could always come back to haunt you. Even still, annualized volumes total $821B this year, representing a sizable 14% increase over last year’s record $720B. That 14% gain compares favorably to the 3% increase in S&P/LSTA Leveraged Loan Index outstanding (LLI) this year. Relatedly, the monthly churn rate (trade volume divided by S&P/LSTA LLI outstanding, which is a liquidity measure that considers the changes in outstandings), has averaged 6% per month this year, a feat last accomplished in early 2019. While index outstandings have moved higher, the number of individual loans comprising the Index has remained relatively flat at 1,440 loans. Conversely, market breadth on the trading side, or the number of distinct loan facilities traded monthly, has risen 5% this year to an average of 1,530 loans per month. Clearly, traders have cast a wider net in the secondary as the search for yield has led to an increase in more “off the run” trade activity. At the same time, the median LSTA/Refinitiv mark-to-market bid-ask spread level (on the traded universe of loans) is another measure that suggests a rise in liquidity this year. The bid-ask spread ended May below 50 basis points, its first sub-50 basis point reading since October 2018, and just 10 basis points shy of its all-time low which was last seen in 2007. And as spreads have tightened, secondary trading levels continue to march back to par value. While the median trade price was flat at 99.75 in May, the average trade price increased 23 basis points to 98.88. Year-to-date, the average has moved 140 basis points higher.
Today’s more liquid, well-bid secondary market is a natural byproduct of not only improving credit conditions (the trailing 12-month default rate on the LLI fell another 88 bps in May, to a 17-month low of just 1.73%) but also a significant increase in visible demand levels, according to Refinitiv. On the CLO side, year-to-date issuance stands at $65B, nearly $40B ahead of last year’s pace and 18% ahead of 2019 activity. And even more impressive, May marked the sixth consecutive month of inflows into retail loan mutual funds/ETFs (at $4.4B), as rising inflation fears continued to drive investors into floating rate loans. Loan funds have now registered almost $24B of inflows in 2021 as compared to the $26B in outflows reported in 2020. In total, visible demand levels have totaled $89B this year while LLI outstandings have increased by “just” $47B. But price levels in the secondary seem to represent fair value with just 25% of the market trading at or above par. This figure stands in contrast to the frothy levels reported at the beginning of last year, where 50% of loans were trading at or above 100 cents on the dollar.
For more information on the LSTA’s Trading Analytics, please contact Ted Basta