November 3, 2021 - While equities enjoyed a 7% “buy the dip” October rally, fixed income returns were far from stellar, with high-yield bond and 10-year treasury returns dropping into negative territory.  On the plus side, the S&P LSTA Leveraged Loan Index (LLI) returned 0.3%, which slightly outperformed the high-grade bond market.  At 4.7% on the year, loan returns remain in the middle of the pack, with a slight advantage (21 basis points) over high yield.  That said, October loan market performance came in at a three-month worst as the market value component of total return ran negative at -0.07%. October’s reading was the worst since July and only the third negative tally this year.  But let’s put that market value loss in perspective because average bid levels decreased by only seven basis points to 98.54.  Furthermore, October’s month-end bid came in just 11 basis points shy of its previous three-year high, established a few weeks earlier. So why the pullback?  According to LevFin Insights, soaring supply took some of the heat off the secondary market in mid-to-late October as monthly institutional loan volume (net of associated repayments) jumped to a six-month high of $42.3B.    

Back in the October secondary, market breadth levels demonstrated no clear direction as the advancer/decliner ratio came in at 1:1, with 45% of loan prices advancing and 45% declining.  In turn, price distributions were mostly flat with par-plus market share decreasing one percentage point to 20% of loans outstanding.  While the best and worst performing loans spanned a range of sectors in October, market laggards mostly resided in the triple-C rated space.  This cohort of loans underperformed the broader market for just the second time this year. But it’s not like lenders became risk-averse – after all, single B’s outperformed double B’s – it was more that a spate of disappointing earnings announcements hit a handful of large borrowers.  Furthermore, the default rate, by amount, slipped to a near-record low 0.20% in October. At the same time, upgrades outpaced downgrades for a ninth consecutive month, at a count of 56 to 33 on a rolling three-month basis, according to LCD.   Additionally, strong market technicals continued to provide a floor to any market pullback in the secondary.  For the fourth month out of the last five, October CLO issuance ran north of $15B at $19.2B; this, in turn, increased YTD issuance to a record $149B or 16% ahead of 2018’s previous full year record.  And not to be outdone, October marked the 11th consecutive month of positive fund flows for loan mutual funds and ETFs, with inflows totaling a five-month best of $3.9B.  Through the first 10 months of this year, fund flows have topped $39B as compared to the combined $65.6B in net outflows across the previous two years.

For more information on the secondary, please contact Ted Basta.

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The LSTA published a Market Advisory which discusses the implications of The Foreign Investment in Real Property Tax Act (“FIRPTA”).