April 27, 2023 - LSTA 1Q23 secondary loan trading volume surged 13% to $211B – the market’s first quarterly increase since 1Q22. Although the $211B figure trailed 1Q22’s near-record tally by 10%, it represented the first $200B-plus showing in a year. Clearly, the lack of primary activity (which remained in a sub-$50B range during 1Q23, according to PitchBook LCD) was constraining secondary volumes, as was the subsequent decrease in market outstandings. Across the first quarter, Morningstar/LSTA Leveraged Loan Index outstandings fell $14.5B, following a $17.5B decline during 4Q22. But, as our readers are aware, exaggerated volatility levels almost always drive secondary activity higher, which became evident yet again during March.
In looking back across the first quarter, the secondary rallied in January, traded sideways in February – and then shifted dramatically in March. Volatility spiked (and markets traded lower) following the collapses of Silicon Valley Bank and Signature Bank (and the acquisition of Credit Suisse by UBS). And while secondary trading levels did in fact rebound from their mid-March lows, 65% of loans were still trading lower by month’s end. In turn, the Morningstar/LSTA Leveraged Loan Index reported its first monthly negative return since September, as market value losses approached 1%. Loan traders traded through the volatility at a fevered pace, with secondary activity surging to $78B in March– an increase of 11% and 23% over January and February, respectively. March’s volume figure represented a 10-month high, with last September’s reading of $70.6B coming in at a distant second (reiterating the correlation between volatility and trade activity). Interestingly, while monthly market breadth, or the number of distinct loans traded, remained in a 1,500-loan range, it was an increase in market depth, or trade frequency, that drove March activity higher. In March, a nine-month high 65% of loans traded 20 times or more with just 22% of loans trading less than 10 times during the month.
From a price point perspective, the secondary ended the quarter at a median trade price of 97.5, 65 basis points lower than February’s reading, but 150 basis points higher on the year. At the same time, the market’s median mark-to-market bid-ask spread on the traded universe of loans remained rangebound at around 90 basis points. Across the quarter, the percentage of trade activity at a price point of 98 or higher increased 18 percentage points to 51%, after the market pulled back from February’s 57% share. This occurred while 1Q23 trade activity at a sub-90 price point fell seven percentage points to 16%, but that improvement took place back in January. That said, 1Q23 distressed trading activity increased 5%, marking the first $5B quarter in two years. This trend is almost certain to continue as defaults are projected to rise meaningfully into 2024; Fitch Ratings expects its current default rate of 2.2% to rise to 2.75% by year-end and to 3.5% in 2024.
LSTA members can view the 1Q23 LSTA Trade Data Study Presentation, here.