December 9, 2020 - Risk assets staged an impressive rally in November as news broke that a COVID-19 vaccine would soon be available in the United States. While equities posted massive double-digit November gains, the S&P/LSTA Leveraged Loan Index (LLI) returned a six-month best of 2.23%. November’s loan market performance lifted year-to-date returns to 1.76%, after flirting with positive territory for the better part of the past two months. The market has seemingly turned the corner, as November’s rally has bled into December, where returns topped 0.6% during the first six trading days of the month.
Back to November, where price gains were widespread across the secondary with 87% of LSTA/Refinitiv mark-to-market loan prices advancing and just 6% declining. November’s advancer/decliner ratio of 15:1 was the most bullish ratio recorded this year. (For context, May’s ratio came in at 7:1 whereas April logged a ratio of 3.75:1.) Moreover, 56% of November’s price movements were better than 1% to the upside, with 7% of loan prices advancing by 5% or more. All told, the market’s average bid level increased 194 bps during the month as prices rallied a striking 80 bps alone on November 9th – the day Pfizer announced the results of their vaccine trials. November’s month-end average bid – 95.11 – was the highest level since the first week of March. Even so, the market remained 165 bps shy of its pre-COVID-19 high registered in late February. As prices ran higher in November, bid-ask spreads tightened 17 bps to end the month at 128 bps. Pre-selloff, the market’s average bid-ask spread toggled between a low of 110 bps in January to a high of 130 bps in late February.
While price gains were prevalent across the lion’s share of the secondary market in November, loan traders were aggressive in bidding up lower rated credits (and beaten down COVID-19 affected sectors) which subsequently fueled the market’s notable push higher. For example, CCC+ rated loan bids increased by an average of 330 bps, elevating the cohort’s average bid level to 86.22 –the highest month-end reading since November 2018. Furthermore, bid levels on B- rated loans rallied 200 bps to a 16-month high of 95.77. By month-end November, the percentage of loans priced below 90 fell five percentage points to just 14%, while 5% of loans remain bid below 70. Conversely, the average bid of BB- rated loans advanced by “just” 102 bps, to 98.25, while the BB flat cohort gained 81 bps, to 98.41. In turn, the percentage of loans priced above par increased to a post-COVID-19 high 3% market share. The performance of the lower end of the market was not only buoyed by the vaccine news but also improving credit trends. For the second month in a row, default rates fell – the rate by count and amount declined by 21 bps to 4.27% and 3.89%, respectively. At the same time, the three-month trailing downgrade ratio fell to just 1.6:1. November marked the 6th month in a row where the ratio improved, after having peaked in May at an ungodly 43:1.