September 21, 2023 - A common theme has emerged across the secondary loan market this summer –prices rallying on very little trade activity. Although LSTA secondary loan trading volume improved 6% to $54.4 billion in August, that figure came in historically light and followed July’s eight-month low reading of $51.4 billion. Since June, monthly volumes have averaged a paltry $55.4 billion, 15% lower than volumes reported during the first five months of the year. While that might not be a perfect comp given the normal summertime slowdown, YTD volumes are in fact 13% lower compared to the same period last year. And while monthly market breadth, or the number of distinct loans traded, has contracted alongside lower volumes, loan counts have remained supportive in a high 1,400 range. That figure compares well to the first quarter’s low-1,500 range when volumes averaged north of $70 billion per month. Clearly, overall trade activity has been tempered by a lackluster primary lending market that has met head-on with a reduction in visible loan demand. To the first point, loan volume to finance LBOs and M&A totaled just $34 billion through August, the slowest pace in 13 years, according to Pitchbook LCD. Additionally, LCD noted that the tradable market has actually gotten smaller this year. The par amount outstanding tracked by the S&P/LSTA Leveraged Loan index fell by $1.7 billion in August, the sixth monthly decline this year. Cumulatively, the index has contracted by $16 billion over the past eight months. But an even better indicator of today’s supply starved secondary is the percentage of trade activity at a price point above par; this more than doubled to 12% since May, after averaging just 5% across the first six months of the year. To put that gain in context, the last time par-plus market share was in a double-digit range was back in December 2021. This “supply-starvation” alone goes a long way in explaining the surge in refinancing activity witnessed across August. To the second point, while CLO issuance increased to a five-month high of $11.1 billion in August, YTD volumes ($75.2 billion) remain 20% lower year-over-year. And even though loan mutual funds and ETFs recorded their monthly inflows ($326 million) for the first time since April 2022, the retail bid has been few and far between this year.
Now on to the good news, where market sentiment remained bullish in August, as advancers outpaced decliners by a ratio of 2:1 in the secondary. In turn, trade prices continued to move higher, rising 31 basis points in August and an impressive 250 basis points since May. By the month’s end, average and median trade price levels increased to 16-month highs of 96.13 and 98.75, respectively. At the same time, bid-ask spreads continued to tighten with the average and median mark-to-market spreads on the traded universe of loans ending July at 83 and 69 basis points, respectively – also 16-month bests.