August 5, 2021 - by Ted Basta. The secondary loan market took a step back in July, with prices retreating 34 basis points to an average bid level just north of 98. In turn, the S&P/LSTA Leveraged Loan Index (LLI) reported a market value loss of 0.35% which drove the total return on the index to negative 0.01%. July marked just the second time this year, and the third time since the March 2020 sell-off, when prices didn’t tack on monthly gains. Additionally, from a total return perspective, March 2021 was the only other month (since last year’s sell-off) when the index fell into negative territory, albeit at a marginally negative 0.002%. Let’s keep these “negative returns” in perspective though because, despite June’s red ink, the secondary recorded its third consecutive month bid above 98. This is no small feat considering that the last time that occurred was way back during the 11-month period ended October 2018.
In actuality, the secondary began to show signs of a top more than a month ago as June decliners nearly doubled to a 40% market share, while advancers fell from 68% to 47%. Those figures worsened in July as the advancer/decliner ratio dipped to 0.24:1 as decliners outpaced advancers 72% to 17%. As the market retreated from its highs in July, traders became far more reluctant to pay a premium to par in the secondary; indeed par-plus market share was halved to a four-month low 11% figure. In taking a closer look at July data, the secondary was firmly bid through mid-month, but sentiment turned bearish during the latter half as increased concerns regarding the Delta variant dominated the headlines. To no surprise, sectors closely tied to the pandemic sold off rather sharply with Leisure Goods/Activities/Movies (-1.1%) and Air Transport (-0.6%) leading the list of laggards. These sectors combine to represent almost 6% of total LLI outstandings. And given the high concentration of CCC loans within the Leisure sector, the high beta CCC index reported a negative return of 0.26% – its first negative reading since last March. While the sector-related June selloff in CCC’s might just be the latest “buy the dip” opportunity, it is noteworthy considering just how important CCC loan returns have been to the market’s overall performance. Over the last 12 months, returns on CCC loans, which had comprised an average of 8% of LLI outstandings, have totaled a staggering 28%. In turn, the broader index has returned 9.5% over the same period. But as credit quality has continued to strengthen, CCC market share has steadily declined to 6.6% – a 16-month low. At the same time, the LLI default rate (by principal amount) fell to a nine-year low of just 0.58% in July. A rather surprising figure considering that the default rate had peaked at 4.2% just 10 months ago.
For more information on the secondary market, please contact Ted Basta .