December 4, 2019 - November was a solid month in the secondary loan market, with S&P/LSTA Leveraged Loan Index (LLI) returning 0.59%. October, however, was a different story. Secondary loan trading volume spiked 19% in October to a six-month high of $64 billion. This followed a two-month stretch where volumes fell below $60 billion per month. Furthermore, the August/September tally of $105.2 billion was the lowest two-month total since fourth quarter 2017. So why the spike in trading volume? Simply put, an increase in volatility drove trade frequency higher as the secondary continued to bifurcate by quality. Conversely, October market breadth (the number of distinct loans traded) increased by just 10 loans to 1,535.
Let’s now talk volatility. The LLI returned -0.45% in October, its worst monthly performance since December, as market value losses in the index approached 1%. October’s average trade price fell 65 basis points to a 95.5 handle, the first sub-96 reading since summer of 2016. (The previous low-water mark was December at 96.3.) While the average sank, the median trade price fell 25 basis points to 98.9 – the first sub-99 reading since February, when the market was still rallying off December’s lows. Accordingly, the average and median MTM bid-ask spreads on the traded universe of loans widened out five basis points apiece, to 87 and 70 basis points respectively, levels also not seen since the beginning of the year. In terms of trade frequency, the percentage of loans that changed hands more than 20 times in October increased seven percentage points to a 53% market share while the percentage of loans trading less than 10 times fell five percentage points to a 33% market share.
An interesting point that illustrates the bifurcation in today’s secondary market is the price gap between the average and median trade price; this widened 230 basis points to 338 basis points since year end. This gapping accelerated during the last three months when the mean and median price gap widened by an average of 45 basis points per month. Furthermore, back in December 2018, “sub-90” volumes accounted for just 7% of trade activity, as opposed to 13% this October (up from 11% in September). This shouldn’t be too surprising, given that the market’s rolling 3-month downgrade ratio increased for the third month running. It now stands at a multi-year high of 5.5:1 in October, which followed September’s 4.9:1 ratio, according to S&P Global Market Intelligence. But that said, ominous credit issues continue to remain contained to just a small portion of the market. First, the default rate by dollar amount sits at just 1.3%, 15 bps lower on the year. Second, the percentage of loans in the S&P/LSTA Leveraged Loan Index rated CCC remains inside 6%, while just 6% of loans are trading at a price below 80.