December 17, 2019 - December has been a strong month in the secondary loan market so far, with the S&P/LSTA Leveraged Loan Index (LLI) already returning over 1%. With less than two weeks remaining before year-end, loans have already delivered an 8-plus% annual return, marking a three-year high. Loan prices actually began rising in November when the average and median trade prices advanced 30 and 15 basis points, respectively. While not an earth-shattering performance, November’s price action revealed a possible bottom for riskier credits – namely those performing loans rated B- or below. It had been several months running where the stressed side of the market had not been additive to LLI returns in any meaningful way. And prior to the November/December rally, this market segment was not only trading below last December’s levels but also testing three-year lows. Although six weeks do not exactly make a trend, trading levels on loans rated B- have improved by 100-plus basis points between month-end October and the second week of December. And over the same time period, CCC+ loan bids have staged quite the rally, rising by an impressive 700 basis points.
While prices improved from over-sold territory in November, volatility subsided as market value returns flipped from negative 0.94% in October to positive 0.12% in November. The sub-90 price sector was the best performer in November as prices rallied 0.77%. But given its modest 12% market share of total trade activity, the rise in prices had a minimal effect on total market gains. On the opposite end of the price spectrum, loans trading above a price point of 98, which comprise 65% of volume, reported a slight market value loss. Also in November, the median bid-ask spread on the traded universe of loans tightened for the first time since July, albeit by 5 basis points, to 69 basis points. As market-wide volatility abated in November, secondary loan trading volume decreased 6% (to $60 billion), after spiking 19% to a seven-month high in October. Following January’s record $76.1 billion in trade activity, monthly volumes have averaged $61.7 billion across 2019 (but a less than stellar $58.6 billion over the past six months). That said, 2019 is headed for another record year in trading activity. Even after removing January from the calculation, annualized 2019 trading volumes total a fresh record $740 billion – more than 3% higher than last year’s level. But perhaps this shouldn’t be surprising: the percentage increase in trading volume has matched the rise in LLI outstandings, which have increased by almost 4% in 2019.