February 25, 2020 - On Monday, February 24, U.S. stock indices recorded their worst decline in two years on concerns the coronavirus outbreak would continue to spread and begin to undermine global economic growth.  In the loan market, bid levels indiscriminately dropped 18 basis points to begin the week, which worsened February’s price decline to 32 basis points.  Sure enough, Monday’s negative price action bled into Tuesday as equity returns slipped firmly into the red on the year while loans still hung onto a positive 0.5% return.  But February loan returns have now dipped into negative territory with just three trading sessions left in the month.  And the weakness in loan land has not been limited to the existential threat of the virus.  Credit quality concerns are mounting once again as the default rate, by issuer count, edged up to a 22-month high of 1.95% last week. According to S&P, there have already been 8 defaults this year – evenly split between January and February.

While February has been a challenge, the price momentum established in late 2019 carried over into January 2020 as trade levels in the secondary loan market continued to grind higher.  But this time around, the price rally was supported by much stronger liquidity levels.  January trading volume surged 25% to a three month high of $62 billion.  While January activity was just $1.2 billion higher than the LTM average, the total actually represented a 10-month high.  At the same time, the number of distinct loans traded surged 6% to 1,510 while the median mark-to-market bid-ask spread (on the traded universe of loans) tightened to a five month low of 67 basis points.

Through the first three weeks of the New Year, prices in the secondary pushed higher as the lower end of the market continued to catch a strong bid.  But during the last several trading sessions of the month, prices pulled back (as volumes spiked) amid the growing concerns regarding the coronavirus virus.  And while the market gave back some its gains around month-end; January marked a number of important performance-based milestones.  First, the S&P/LSTA Leveraged Loan Index produced a positive return for the third month in a row, a feat that hadn’t occurred since September 2018 (but might be coming to a grinding halt in February).  Second, the median trade price increased 75 basis points to 100.  It’s been 15 months since the median trade price was last reported at the psychologically important “par” level. Furthermore, 46% of January trade volume occurred at a price north of 100 – up 21 percentage points from December.   Lastly, the average trade price pushed higher by almost 100 basis points, to 97.33, an eight-month high.  That all said, market breadth wasn’t stellar in January as the advancer/decliner ratio came in at a three-month low of 1.3:1.

LSTA Full and Associate Members can access the full review, including charts, here.  For more information, please contact Ted Basta.

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