April 21, 2022 - 1Q22 LSTA secondary loan trading volume increased 20% to $232B, the second busiest quarter on record, according to the LSTA’s Secondary Trade Data Study. Of course, 1Q20’s record still stands at $250B, but those were different times. Almost 50% of 1Q20 volume transacted during March alone, whereas 1Q22’s figure was evenly distributed across the three-month period -$76B in January and north of $78B across February and March (monthly totals that only trailed March 2020). As important from a liquidity perspective, monthly market breadth (or the number of distinct loans traded) reached new highs during 1Q22 with an average of 1,657 individual loan facilities changing hands each month. Back in 1Q20, that figure stood at 1,479 loans. (For even more history, LSTA full members can access our new Monthly Trade Stats file which contains over 10 years of historical trading stats.)
This year’s flurry of trade activity has clearly been linked to the substantial up-tick in price volatility across the secondary loan market. Back in January and through early February, daily average trade price levels were rangebound between 99 and 99.5, while the median price sat just 10 basis points shy of par. But the secondary began to weaken in earnest during mid-February, as global markets traded off in anticipation of Russia’s invasion of Ukraine. Pre-invasion, secondary loan prices had already fallen from their post-pandemic highs – price levels were hovering around 98. But once the invasion occurred, the loan market was no longer immune to the severe selloffs that other asset classes had been experiencing for most of the first quarter. From February 23rd through March 15th, the secondary traded down more than 300 basis points as the market’s average trade price sank to 95.2 (its first sub-96 reading since late 2020). Over that same period, MTM bid-ask spreads on the traded universe of loans spiked 40 basis points to a full-point. But at those levels, loan traders could no longer ignore the oversold conditions and the buying opportunity which ensued. To wit, the secondary experienced a rather quick V-shaped recovery during the last 12 trading sessions of March. Over those final two weeks, trade levels rebounded 255 basis points. And by month-end, loans were once again changing hands at an average price and bid-ask spread of 97.7 and 80 basis points, respectively. That said, traders remained cautious not to over-bid into the rally as just 1% of March trades transacted above 100. But on the other hand, only 3% of trades were done at a sub-90 price point. Not surprising given that March “distress” indicators still supported a constructive secondary market. First, the percentage of loans trading in a sub-80 range sat at just 1.5% of total activity while loans rated B- and within the CCC range accounted for 23% and 5% of loans outstanding, respectively. Moreover, while the size of the B- rating cohort has increased off its 12-month lows (20%), the size of the CCC cohort has declined three percentage points since last April. Second, although some economic pundits are now calling for a recession, the fact remains that the loan market’s default rate stands at a 10-year low of just 0.19% as rating migration has favored upgrades over downgrades for the past 14 months. Lastly, the market’s technical backdrop remained strong during the first quarter. Since year-end, inflows into loan mutual funds & ETFs totaled a robust $21.8B while CLO creation (which was off 25% from its record 2021 pace) totaled $30.6B. In total, these visible demand levels of $52.4B outpaced the $50B increase in S&P/LSTA Leveraged Loan Index outstandings, which now sit north of $1.4B. And as we look ahead into the second quarter, the fundamental and technical conditions of 1Q22 seem to be prevalent in April as well, with traders noting that the secondary is trading about 50 basis points richer over the past three weeks.
For more information on the secondary, please contact Ted Basta.