November 17, 2021 - by Ted Basta. Reversing a three-month trend of declining secondary activity, LSTA loan trading volume surged 28% in October to $69.8B. October volume represented a seven-month high which came in 19% ahead of its trailing three-month average of just $58.5B. The same positive development was witnessed in monthly market breadth levels, as almost 1,600 individual loans changed hands in October as compared to the trailing three-month average of just 1,486 loans. All this demonstrates that where there was quite the move away from the secondary during the third quarter, that trend clearly changed in October. One reason for the shift back to the secondary was lower new institutional lending activity and an increase in visible payments. In turn, October S&P/LSTA Leveraged Loan Index outstandings grew by just $10M, pennies on the dollar when you consider that LLI outstandings grew at an average rate of $13.75B per month across the third quarter. But let’s keep the October dip in primary activity in perspective because year-to-date institutional leveraged lending activity has already set a new annual record at $573B (up 131% year-over-year). Finally, the push back into the October secondary boosted par-plus market share to a four-month high of 28%, a month over month increase of eight percentage points. The secondary continues to be well bid, but not necessarily overbought as we saw back in the first half of 2018, when par-plus market share averaged almost 60% of trade activity. Turning to the demand side, visible flows into the asset class continued at a record pace in October. Over the first ten months of 2021, CLO creation ($150B) and Loan Mutual Fund/ETF inflows ($40B) combined to total a record $180B in new demand. All told, CLOs and Loan Mutual Funds/ETFs now hold an approximate $993B share of institutional loans outstanding or roughly 76% of the market. Clearly the skew here is towards CLOs which hold $853B or 66% of outstandings.
Back to the October secondary, where loan prices tacked on 37 basis points to their average bid level, which finally broke the 99-level for the first time since the summer of 2014. At the same time, the median bid level increased 13 basis points to 99.88, or just 12 basis points shy of par. And as bids marched higher, the average and median bid-ask spread on the traded universe of loans came in at 50 and 39 basis points, respectively – levels not seen since the LSTA began collecting monthly trade data back in 2007, a time when both the average and median trade prices were well north of par value. From that point of view (tighter spreads at lower price points), liquidity metrics have improved a great deal since back in 2007 when annual trading volumes totaled $520B. In comparison, the LSTA now estimates that full-year 2021 trading volumes should come in north of $790B, or roughly 2% ahead of last year’s record total.
For more information on the LSTA’s Trading Analytics, please contact Ted Basta.