July 13, 2021 - by Kenny Riaz. The secondary loan market continued to produce gains on lower rated credits, as the riskiest loans drove returns yet again. The S&P LSTA Leveraged Loan Index (LLI) returned 0.37% in June, down from the prior two months where the index registered a return of 0.58% in May and 0.51% in April.  YTD returns now stand at an impressive 3.28%. On the cross-asset front, high yield bonds now lead fixed income returns at 3.70% on the year. Conversely, high grade bonds and 10-year treasuries are still in the red on the year at -1.06% and -4.10% respectively – as investors continue to favor a risk-on mentality.

Investors are piling into riskier assets due to shrinking yields, driving demand for lower rated paper, and ultimately compressing spreads across the debt stack. In the loan market, secondary spreads have declined to the lowest levels since the 2008 financial crisis. Taking a deeper look at spread compression, the average discounted spread for B- loans has tightened 48 basis points from the beginning of the year to L+458. Meanwhile, on the CCC+ end of the market, discounted spreads have tightened significantly from June 2020 when discounted spreads averaged L+1267. Today that figure sits at just L+685. Noting the inverse relationship between yield and price, the price for CCC+ paper has risen sharply with the average bid rising to 92.82 by June, up more than 450 basis points since year-end 2020.  It becomes clear how much the CCC space has driven loan returns this year.

Shifting our focus to market wide average bid and bid-ask-spread levels, the secondary remained well bid with the average rising 28 bps to 98.37.  At the same time, the average mtm bid- ask spread shed another 2 basis points, ending June at just 75 basis points. Rising bids and tightening bid-ask spreads can be attributed to the continued inflows of capital to the loan market. June marked the 7th consecutive month of positive fund flows for loan mutual funds.  Since the beginning of the year, loan mutual fund inflows have totaled $19.7 billion.  Even more impressive, a record $81 billion of new CLOs have come online during the same time. On the supply side of the equation, June saw a significant amount of new issuance hit the secondary market.  June’s frenzy of new issuance was driven primarily by M&A related deals, with M&A new issue volume rising to a 17-month high. June’s mostly flat advancer/decliner ratio directly reflected this surge in new loans, with decliners rising to 40% and advancers falling to 47%. A further break down of June’s split market reveals that loans which reported price gains of 1% of less totaled a 47% market share, compared to the 43% of loans that reported MTM losses of 1% or less. Secondary price distributions held steady across the month as the percentage of loans priced above par increased one percentage point to a 22% market share, while loans priced in a sub-70 price range remained rangebound at just a 2% share. 

For more information on the secondary market, please contact Kenny Riaz at kriaz@lsta.org.

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