July 23, 2020 - The COVID-19-induced price volatility and subsequent trading activity observed in the secondary loan market since March has been unprecedented. According to the LSTA’s 2Q20 Secondary Trade Data Study, loans were trading in a mid-97 context at the beginning of March. By March 23rd, the secondary traded down to levels not seen since the height of the financial crisis – the average trade price plummeted roughly 20 points to a sub 78-context. But from that point forward, the market found its bottom, as loans caught a bid, partly thanks to the Fed. During the last six trading sessions of March alone, prices rebounded 11 points as the secondary rallied back into a sub-90 context. Loan prices continued to rise off their lows in April and across the entirety of the second quarter. All told, the market’s average and median trade prices improved 410 and 500 basis points across the quarter, respectively. By June’s end, the average trade price hit a 93 context while the median trade price sported a 96 level. That said, average price levels remain almost 5 points lower than their January 2020 high-water mark. And as bids ran higher across the second quarter, the median LSTA/Refinitiv Mark-to-Market bid-ask spread tightened another 50 bps in June to 125 bps (after contracting 60 bps combined in April and May). While the metric has improved, readers should remember that in January bid-ask spreads were roughly half today’s level; this illustrates a perception of higher level of risk in the secondary market as we enter the second half of 2020.
As price volatility generally subsided (and outflows normalized), LSTA second quarter loan trading volume fell 19% to $202B. But let’s put that decline in perspective. First, this is just the fourth $200B-plus quarter on record. Prior to March 2020 (when the market traded a record $119B, which led to a record $250B first quarter), trading volume peaked in January 2019 at $76B. Between February 2019 and February 2020, monthly volumes averaged just $61.3B.
In that context, second quarter volumes appeared strong. In June, trading volume increased 7% month-over-month, to $65.3B, but June’s activity fell short of the $75.2B traded during April (when loans returned a post-credit crisis high 4.5%). Market breadth (the number of loans traded) improved in June by 8% as 1,485 loan facilities traded, the highest amount since February. On average, June saw 120 more loans trading than during each of the previous two months as traders casted a wider net across the secondary. In turn, market depth, or trade frequency, declined across the quarter, thus the reduction in volumes. To further illustrate the unprecedented level of price volatility since the start of the pandemic, we turn to the distribution of trade activity by price range. Pre-March, 37% of 2020 trading volume transacted at a price point north of par. During the four months that followed, par-plus trading volume averaged less than 1% of total activity (although it did hit 1% in June). While traders remained hesitant to pay above par in the secondary, the lower end of the market continued to rally off over-sold territory. To that point, loans trading at a price point below 90 constituted just 21% of June trade activity– a noteworthy improvement from the 45% figure reported at the end of the first quarter. But despite the lower end of the loan market showing resilience over the last three months, credit trends remain bearish as the market continues to experience a heightened level of rating downgrades and an accelerated default cycle. While price momentum remained positive in July (bids tacked on another 150 bps gain thus far), expectations for the second half of the year remain cautious at best with a very real possibility for below average returns accompanied by above average volatility.