April 5, 2023 - While Jamie Dimon wrote to his investors this week that the banking crisis is not over and will cause “repercussions for years to come”, the broader markets have seemingly recovered —at least for now. Initially, though, volatility spiked across asset classes in mid-March following the shotgun marriage of Credit Suisse and UBS and the collapses of Silicon Valley Bank and Signature Bank. But the broader markets enjoyed quite a relief rally to close out the month, which lifted monthly returns back into positive territory – that is with the exception of the BSL market. According to the Morningstar/LSTA Leveraged Loan Index (LLI), loan returns ran negative in March for the first time since September, albeit at just -0.03%, but negative none the less. In turn, the loan market’s 1Q23 return fell slightly to 3.2%, which now trails most major asset classes, including the high-grade (3.6%) and high-yield (3.7%) bond markets.
Following a strong start to the year in the secondary loan market, traders began “selling the rally” by the end of February. This held particularly true on the lower end of the market, which had been producing outsized gains for almost six months. And while the secondary lacked conviction and traded sideways during the beginning of March, it went on to trade off 160 basis points by March 20th. But from that point forward, loan prices rebounded during eight of the last nine trading sessions, clawing back roughly half those losses by month-end. Even still, the LLI reported a market value loss of 0.77%, as the market’s average bid level ended March at 93.38 – 133 basis points lower than mid-February’s high-water mark. In looking across all of March, market breadth ran decisively negative where the market’s advancer/decliner ratio dropped to 0.4:1, with just 29% of loan prices advancing and 65% declining. Relatedly, the market’s average bid-ask spread widened 11 basis points to 126 basis points.
Away from the secondary market, LLI outstandings contracted for the sixth month running, shrinking by $2.2B in March. The cumulative decrease in outstandings since September is approaching $32B, with roughly half that amount occurring this year. At the same, new visible demand levels remained challenged across the first quarter as loan mutual fund and ETF outflows persisted. While not a new trend (flows have been negative for 11 months), outflows totaled a six-month worst $6.8B in March, more than double the amount reported in January and February, combined. On a brighter note, even though such persistent outflows have capped the secondary’s ability to get back to near-par levels, CLO issuance has remained solid this year. During March, CLO issuance approached $11B, which brought the first quarter’s tally to $33.1B, roughly where we were this time last year. That said, 2023’s runway remains long – with the availability of corporate credit now in question and a default rate that is expected to rise into a 2% – 2.5% range by the end of year.