August 20, 2020 - There were no fireworks to be had in the secondary loan market in July. LSTA secondary loan trading volume fell to a seven-month low in July while prices continued to grind higher during month four of the rally. July loan trading volume totaled $52B, off 25% from June’s $65B and almost 14% below the LTM average of $60.8B (excluding March’s record $119.3B). From a price distribution standpoint, sub-90 trading volume decreased six percentage points to a 21% market share; conversely, the 98 and above cohort reported a six-percentage point increase, to 33%. Traders were even willing to once again pay above par in the secondary for sought after credits – which drove par-plus trading volume to a “whopping” 3% share. The belly of the trading market (46%) remained in a 90 to 98 price range, where the cohort sported an average bid of 95.45. Despite the continuing recovery, trading volume on LSTA Distressed docs (“distressed”) soared across June and July, with monthly volumes averaging $4.7B or roughly 8% of total activity. In comparison, distressed volume totaled less than 3% of total trade activity between January and May 2020. The increase in distressed volumes is not all too surprising given the market’s accelerated default cycle – the default rate swelled to 3.9% by amount and 4.1% by count in July, according to the S&P/LSTA Leveraged Loan Index. Pre-COVID-19, those rates sat at just 1.6% and 1.5%, respectively. And as the default rate has risen, so has the number of distressed shift dates issued by the LSTA. Since the beginning of April, a span of just four months, the LSTA has published distressed shift dates on 32 credit agreements as compared to just 10 across the four months prior.
On to the July price rally, where strong market breadth drove prices higher for the fourth month running. The market’s advancer/decliner ratio improved to 6:1 in July, with 79% of loans trading higher and just 13% moving lower. In turn, the median trade price increased 62 bps to 96.62. Since the market’s nadir in March, the median price rallied 562 bps, but still sits three-plus points lower than its pre-COVID-19 high. At the same time, the average trade price improved 64 bps to a mid-93 range. This average is up 475 bps since the beginning of the rally, but remains 415 bps off its February high. And while prices continued to improve across almost 80% of the market in July, LSTA/Refinitiv Mark-to-Market bid-ask spreads on traded loans continued to meaningfully tighten. The median bid-ask spread narrowed another 20 bps, to 105 bps, by the end of July, while the average bid-ask spread tightened 27 basis points to 133 bps. Even still, both figures remain roughly 50 basis points wider than their February tights. Furthermore, today’s bid-ask spread levels are generally wider than historically observed (given where the market is trading), a fact that underpins the rapid shift in the credit cycle and the uncertainty over the shape of the expected recovery.