October 7, 2021 - by Ted Basta. Despite a substantial sell-off in equities and most of fixed income, loans actually performed quite well in September. The S&P LSTA Leveraged Loan Index (LLI) returned 0.64% as the market value component of return increased to an eight-month best 0.31%. Secondary loan prices reached their highest level in almost nearly three years, as the market’s average bid level increased 37 bps to a new pandemic high of 98.62. Incredibly, prices advanced during all but one September trading session. By quarter’s end, the average bid level was 20 bps higher than the prior 2021 high-water mark of mid-June, and the highest reading since October 2018. Better still, market breadth was overwhelming bullish in September as 75% of loan prices advanced while only 15% declined. At a ratio of 5:1, September’s advancer/decliner ratio was the strongest showing this year.
While the best performing loans spanned a range of sectors in September, they were largely concentrated among issuers rated B- and lower – a common theme across the past 12-months. At the same time, the portion of loans priced above par in the secondary increased nine percentage points to a three-month high of 21%, which sits seven percentage points ahead of the 12-month average. Clearly, loan traders are once again willing/needing to pay a premium to par in the secondary in order to put money to work in a very well bid market. Strong market technicals continued to aid and abet this trend as visible demand levels have reached record proportions. September marked the 10th consecutive month of positive fund flows for loan mutual funds, with inflows totaling $3B. Through the first three quarters of this year, fund flows have topped $35B. To put that figure in perspective, loan mutual funds experienced a combined $97B in net outflows across the previous seven years (2014-2020). Even more impressive, CLO issuance totaled $17.4B in September, which followed last month’s record $19.2B in new deals. In total, third quarter CLO creation came in at $46.7B, which propelled YTD issuance to $129.8B –already surpassing 2018’s full-year record of $128.9B. As we look ahead, expectations for full-year 2021 CLO issuance have been upped to the $160B range. While a heated 2021 is shattering records left and right, some wonder whether the tempo continues into year- and LIBOR-end.
For more information on the secondary, please contact Ted Basta.