April 10, 2019 - Three months into the new year, and loan returns have totaled an impressive 4%. But the 2019 loan market rally actually came to a screeching halt in late March when the Fed announced that rates would no longer be rising anytime soon. The result? The S&P/LSTA Leveraged Loan Index (LLI) fell back into negative territory by returning -0.17% in March as market value returns sank to negative 0.69%. Loans went on to end the month as the only asset class to deliver a negative return and, ultimately, outperformed only 10-year Treasuries in terms of year-to-date return. That said, 2019 loan returns have still tracked to a nine-year best and have already tacked on another 0.77% during the first seven trading sessions of April. Furthermore, the market’s median Mark-to-Market (MTM) bid level ended March at 98.375, a 235 basis point increase since year-end.
Back to March performance where the loan market’s advancer/decliner ratio came in at a three-month worst. All told, 62% of loans reported Mark-to-Market (MTM) price losses while just 23% reported gains; this is a far cry from the previous two months, where advancers boasted a 77% share. Average MTM bid levels moved lower by 67 basis points, to an average bid of 96.41. And even though MTM bid-ask spreads continued to tighten through mid-April, they widened back to 107 basis points by month end– right where they were in late February. Interestingly, March marked the first month in the last six where technicals actually shifted toward excess demand (not to mention a default rate that fell below 1%). On the supply side, S&P/LSTA LLI outstandings increased by just $3.7 billion in March and “only” $36 billion across 2019 – a slower pace than last year when outstandings grew by an average of $16 billion per month. While new deal flow has been limited, a revitalized high-yield bond market has increasingly been used to take out existing loans as well. (On that note, LCD recently wrote that borrowers are issuing high-yield bonds to take out term debt in the highest volume since the first quarter of 2017.) On the demand side, CLO issuance totaled north of $10 billion in March, which increased year-to-date issuance to a respectable $28.5 billion. This is only 11% lower than 2018’s record pace, but is inflated by CLOs being issued with 2018 collateral. Moreover, investors continued to pull money from loan mutual funds – a trend that has lasted for the better part of the past six months. March outflows came in at almost $4 billion, with the majority of those withdrawals taking place after the Fed announced its dovish stance on rates. In summarizing the previously mentioned March technical data, visible demand outpaced new supply by roughly $2.6 billion – but bids still pulled back in the secondary. Apparently, as mutual funds sold loans to meet redemptions in March, the follow-on bid wasn’t strong enough to avoid a pull-back in the secondary. But March showers may bring April flowers: This month’s market value returns have already totaled 0.63%.