November 19, 2020 - LSTA secondary loan trading volume increased 6% in October, to a four-month high $60.4B, after rising 19% in September. This is the first time that volume increased in back-to-back months since March. These recent increases in trading activity have been closely tied to improving supply and demand conditions. First, institutional loan volume totaled an impressive $76B across September and October. This two-month total was higher than the previous five months combined. Second, CLO issuance ran above $11B during consecutive months for the first time since April 2019. Better yet, CLO activity averaged $12.1 over the past two months, a figure that comes in $6.3B higher than the previous six-month trailing average of $5.8B.
As new issue loan volumes ran higher in October, prices softened for the first time since March, thus ending the market’s storied price rally at six months. Although the total return on the S&P/LSTA Leveraged Loan Index (LLI) remained positive in October, at 0.2%, October marked the first time since March where the market value component of return was negative, albeit slightly at -0.17%. The trading market though, revealed a deeper decline in prices as an increase in “off the run” activity drove aggregate price levels lower. In turn, the number of loans that changed hands in the secondary in October, or market breadth, hit a two-year high of 1,547 loans in October (the LLI holds 1,440 loans). But, the market’s advancer/decliner ratio fell below 1:1 for the first time since March. In October, 51% of loans reported losses (a seven-month high) while just 40% of loans reported gains (a seven-month low). All told, the average trade price fell 0.8%, or 64 bps, to 95.36 after hitting a post-COVID high of 96 in September. The median trade price also fell from its post-COVID high, declining 25 bps to a 98-handle. The market’s average and median bid levels remain 225 bps and 200 bps shy of their 2020 high watermarks which were established back in mid-February. Even still, the secondary market remains relatively well bid – a trend that strengthened in November as prices moved higher and LLI returns once again turned positive on the year.
Back to October trading stats, where 50% of trades printed at a price between 98 and 100, with an additional 4% of trades occurring above par (one-third of loans were trading above par back in February). At the same time, LSTA/Refinitiv mark-to-market bid-ask spreads on the traded universe of loans continued to tighten marginally as five bps were shaved from both their average and median levels. These ended October at 102 bps and 83 bps, respectively. Both figures are now in earshot of their February tights, which were reported at 78 bps and 63 bps, respectively. The lion’s share of loans (57%) now trade at a bid-ask spread between 51-100 bps as compared to 21% during the market downturn in March. That said, 44% of loans were trading at a bid-ask spread of 51 to 100 bps pre-selloff– noting that an additional 39% of loans were trading at a spread of 50 bps or less.