May 20, 2021 - by Ted Basta. While the LSTA loan trading headline reads “Volume Slips 8% in April”, that belies the fact that it was a very active month, with $69.4B of trading – the second busiest month in a year.  Turns out March ‘21 was just a hard comp as monthly volume surpassed $75B for just the fourth time in 14 years.  The other three include the highly volatile periods of March 2020, April 2020 and January 2019.  So far in 2021, secondary trading volume is tracking to an all-time high, although annualizing just four months of data is always dangerous.  That said, annualized volumes total $835B this year, representing a 16% rise over last year’s record $720B.  Furthermore, the monthly churn rate (S&P/LSTA Leveraged Loan Index Outstanding divided by trade volume, which is a liquidity measure that considers the changes in outstandings), has averaged 6% per month across the first four months of the year, a feat last accomplished in early 2019.  At the same time, the median LSTA/Refinitiv mark-to-market bid-ask spread level (on the traded universe of loans) is another measure that suggests a rapid rise in liquidity this year.  The bid-ask spread ended April at 50 basis points, only 12 basis points shy of its all-time low which was last seen in 2007.

This year’s higher churn rate and tighter bid-ask levels are natural byproducts not only of stronger liquidity levels but also a sizable increase in visible demand.  Since year-end, loan mutual fund/ETF assets under management (AUM) have increased by $21B while CLO AUM has risen by more than $44B – for a grand total of $65B in new demand. This is more than double full year 2020’s new demand figure, says Refinitiv.  But according to a call yesterday with several prominent buy-side portfolio managers and traders, today’s secondary market appears well balanced, and valuations appropriate given the outlook for the broader economy and, more specially, the stronger credit outlook for loan borrowers.   A compelling datapoint which backs up that statement and suggests the secondary is in fact fairly valued is the percentage of loans that are bid at par or better, which currently sits at 16%.  As recently as February, the percentage was 35%.  More to the point, today’s market conditions are far different from the frothy levels of early 2019, when more than 50% of the market was bid at or above par in the secondary.  Additionally, the median trade price level, which was flat in April at 99.75, and the average trade price, which was down 20 basis points to 98.65, suggests that prices in the secondary do have some room to run or, more appropriately, walk.   

For more information on the LSTA’s Trading & Settlement Analytics, please contact Ted Basta.

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Market Advisory on FIRPTA

The LSTA published a Market Advisory which discusses the implications of The Foreign Investment in Real Property Tax Act (“FIRPTA”).