February 23, 2023 - LSTA secondary loan trading volume increased 44% in January to a three-month high of $70.4B.  But of course, December was an easy comp to beat.  At just $49B, it was the market’s first sub-$50B monthly print since the summer of 2020.  Even still, January activity marked just the second time since July that volumes ran north of $70B. Clearly, many portfolio managers had excess cash to put to work in the secondary; despite an uptick in institutional lending activity, after factoring in January paydowns, Morningstar/LSTA Leveraged Loan Index outstandings actually contracted by roughly $7B.  And as traders became more aggressive in bidding up the secondary with a wider net, the loan market enjoyed the strongest start to a year since 2009.  To that point, market breadth ran decisively bullish in January, with the number of loans trading once again topping 1,500. The market’s advancer/decliner ratio improved to almost 10:1 (from 1:1 in December), with 87% of loan prices advancing and just 9% declining.  Better still, January’s ratio improved equally on both sides of the equation with advancers increasing 39 percentage points and decliners falling 38 percentage points.  In turn, the market’s average trade price increased a rather noteworthy 172 bps, to 94.4 – the first monthly reading above 94 since August.  And as prices moved higher, LSTA/Refinitiv MTM bid-ask spreads, on the traded universe of loans, tightened by 10 bps in January to 100 bps – the tightest level reported since May. 

Back to January trading activity, where the cohort of loans trading above 98 cents on the dollar represented a 50% share of total volume, double the 27% reported just one month ago.  Most remarkably, par-plus trading volume came back to life in 2023, registering a 6% volume share, after averaging less than 1% across the second half of 2022.   While the stronger double-B rated category drove par-plus trading higher, it was the single-B space that enjoyed a burst of liquidity in January. Trading in that cohort increased 64% (or 20 percentage points more than the broader market).  And although single-B rated loans outperformed double-B loans during the January rally, the price gap between B+ and B- loans actually increased 20 bps to 640 bps.  While 20 bps may be a marginal widening, it does speak to the ongoing concerns around credit quality, particularly on the lower end of the market.  But this isn’t a new theme.  In June, the trailing three-month rating downgrade/upgrade ratio began favoring downgrades for the first time since January 2021.  And over the past seven months, the ratio has progressively worsened from 1.3 (downgrades for every upgrade) to 3.1.  But such warning signs notwithstanding, the LLI’s default rate (by amount) ended January at just 0.83%; this still stands well below its 10-year average of 1.9% and its historical average of 2.7%.