September 6, 2018 - It’s been quite the volatile summer in loan land, comparatively speaking of course. Loan prices once again pulled back during August as the S&P/LSTA Leveraged Loan Index returned just 0.47% (market value returns ran negative at 0.07%). August performance was in stark contrast to July, which was in starker contrast to May and June. Back in July, prices in the secondary rallied from oversold territory after falling for two months. The price rally fueled the LLI’s July return to a six-month best 0.74%. Surprisingly, July’s market value return (+0.27%) represented just the first positive reading since January. Even so, loans have returned 3.3% on the year and 4.9% over the last twelve months. Loan returns have topped each of the other major fixed income asset classes during both time periods, including 10 year Treasuries and High-Grade Bonds, both of which still find themselves in the red.
While price performance in the secondary has ebbed and flowed over the past four months, one trend has remained intact – net new supply has continued to outpace new visible demand. But it’s not as if demand has waned, it just hasn’t kept up with the new issue market, which has been on a tear to say the least. Take August as an example. Monthly CLO issuance totaled a robust $13.6 billion – a level roughly 18% higher than this year’s average (CLO issuance is up 26% in 2018 over the same time last year). Add to that amount an estimated $900 million of August mutual fund inflows and total visible demand reaches $14.5 billion – a rather strong figure by historical standings. But that tally came in $13.5 billion short of the $28 billion increase in LLI oustandings. Furthermore, according to S&P LCD, the supply surplus across the past four months stands at $29.2 billion (the highest reading for any four month period since the end of 2015). And over that four month period, the LLI has added 53 new issuers represented by 63 new facilities which, after accounting for repayments, added an impressive $54 billion in new loans since month-end May. Today, LLI outstandings sit at a fresh record of $1.09 trillion.
Back to August performance, where market volatility faded as prices in the secondary fell by an average of just 7 basis points. In turn, the market’s advancer/decliner ratio failed to illustrate any conviction. All told, 41% of loan prices advanced while 38% declined. August’s advancer/decliner ratio of nearly 1.1:1 was a far cry from July’s six-month best 3:1 ratio. Unsurprisingly, par-plus market share was basically flat, increasing 1 percentage point to a 45% share. Finally, from a sector standpoint, Retail once again outperformed all other major industries in August by returning 1.2%. And at 6.6% on the year, retail comes in as the market’s top performer.
For more information, please contact Ted Basta.