June 21, 2023 - LSTA secondary loan trading volume remained light yet again in May, declining minimally (less than 1%) to $57.4B. Back in April though, volumes plunged a noteworthy 26%, after hitting a 10-month high of $78B during March. Over the past two months, trading activity totaled just north of $115B, marking not only the lowest two-month reading in almost two years but also the first consecutive two-month period where secondary activity slipped below $60B per month (over the same period). Furthermore, volumes have averaged $57.5B since April, off 11% from the LTM average of $64.5B. Interestingly though, while the market experienced a substantial fall-off in market breadth during April, where the number of distinct loans traded fell to 1,428, that figure rebounded to its first quarter monthly average of 1,500 loans. That all said, year-to-date (YTD) secondary volume stands at $326.7B, down 13% from the same time last year. But at this current run rate, annualized 2023 volumes would represent just a 5% decline from last year’s record total of $824B.
As we spoke about last month in this space, the drop-off in secondary activity shouldn’t be all too surprising given that the broadly syndicated loan (BSL) market has been shrinking while visible demand levels have been declining. (And, of course, not to mention the short-term transitional effect of the recent purchase of Credit Suisse by UBS). Case in point, Morningstar/LSTA Leveraged Loan Index outstandings ended May at $1.34T, 1.3% lower YTD and more than 2% shy of their all-time high during September. Additionally, the $31.3B of institutional leveraged lending (excluding refinancings) this year marks a low for any comparable period since 2009 and is running just below the $32.7B for the comparable period in 2008, according to PitchBook LCD. And on the opposite side of the ledger, BSL CLO issuance is off 26% from the same time last year, while loan mutual funds and ETFs have reported YTD outflows of $17.9B, according to Refinitiv and LIPPER.
Turning back to the May secondary, market sentiment turned bearish once again, as decliners outpaced advancers by a ratio of 3.6:1, while aggregate trading levels fell during 19 of 21 sessions. In turn, loans experienced their worst sell-off of the year, at 87 basis points, as the market’s average trade price fell to a five-month low of 93.6 while the median level dropped 100 basis points, to a 97 handle. And as bids declined across May, the secondary became even more bifurcated – trade activity in the sub-90 price range increased four percentage points to a 20% share, with roughly one-half that amount coming in at a sub-80 price point. Despite this overall weakness though, mark-to-market average and median bid-ask spread levels on the traded universe of loans remained rangebound, at 96 and 80 basis points, respectively. But we do note this all has occurred on very little trade volume over the past two months.