January 25, 2023 - 2022 Annual LSTA secondary loan trading volume increased 6%, to a record $824B. In comparison, Morningstar/LSTA Leveraged Loan Index outstandings expanded just 4%. While par trading activity improved in 2022, distressed trading volume – loans trading on distressed documents – fell a staggering 43% to just $13B, the lowest level since the LSTA began closely tracking the data in 2007. All told, market-wide average trading volume increased to $3.2B per day in 2022, with almost 650 individual loans trading each day.
In looking back across the entirety of 2022, secondary activity surged during the first half year to $459B – just $1B shy of the busiest 6-month period on record (that record being the first half of 2020, of course). And as volumes moved higher, market breadth improved to an average of 1,600 individual loans trading monthly. To no surprise, a rapid rise in price volatility (to the downside) once again drove secondary market activity higher. From January through June, trade prices fell roughly 450 basis points into a mid-95 bid range while LSTA/Refinitiv MTM bid-ask spreads, on the traded universe of loans, doubled to 100 basis points. All told, loan returns fell 4.5% across the second quarter, which sank YTD returns to- 4.55%; this was the second worst reading for any comparable period since the Great Financial Crisis. But despite the poor return performance, the market still grew in the first half of 2022. First off, LLI outstandings expanded by $64B. Second, visible demand levels totaled $88B as CLO issuance totaled $73B and Loan Mutual Fund/ETF inflows surpassed $15B (though this of course began to reverse in May).
The second half of 2022 would go on to look far different than the first. On the positive side, volatility normalized as an over-sold secondary market finally caught a bid. The Index would go on to finish the year returning negative 0.6%, as prices and bid-ask spreads mostly stabilized in a low 90’s and 110 basis point range, respectively. But this turn-around in performance took place while noteworthy technical shifts were occurring. Take the supply side for example, where LLI outstandings would go on to increase just $1.4B over the last six months of the year; after contracting by more than $20B during the fourth quarter. And the story remained the same on the demand side, as second half CLO issuance dipped 25% to just $55B while loan mutual fund/ETF inflows turned into outflows to the tune of $28B. In turn, secondary trading activity trailed off dramatically in the second half with volumes falling 20% to $374B. At the same time, the number of loans trading monthly fell 5% to an average of 1,530. And while trading volumes improved marginally across the fourth quarter (up 1%), December activity fell to just $49B – the first sub $50B monthly reading since August 2020. In looking at December in isolation, the share of loan trades in a sub-90 price range increased to 19% of total activity – up 17 percentage points on the year and the highest level reported since June 2020. Conversely, loans trading at a price point of 98 and above, represented 29% of December activity as compared to the 91% figure reported just one year ago. Those two stats alone go a long way in describing the year in the secondary loan market. For more information on the 2022 trading market, please download the LSTA’s Fourth Quarter Secondary Trade & Settlement Data Study.