August 7, 2019 - Following two consecutive months in the red, secondary loan market prices finally caught a bid in July.  As a result, the average bid level on the S&P/LSTA Leveraged Loan Index (LLI) increased 27 basis points, to 97.06.  The move higher pushed the July LLI return to a three-month best of 0.8% as market value returns (0.29%) were positive for just the second time in five months.  The Index had returned 6.6% through month-end July, but prices have since softened following an “insurance policy” rate cut by the Federal Reserve and an intensified trade war with China.  But while the Dow plunged 760 points on Monday, loans slid just 10 basis points.

Back to July loan performance, where the loan market’s advancer/decliner ratio came in at a three-month best of 3:1.  All told, 64% of loans reported Mark-to-Market (MTM) price gains while just 20% reported losses; this is a far cry from the previous two months, where advancers averaged a meager 30% share.   Furthermore, there were a notable higher percentage of big moves to the up-side in July. Case in point, 13% of loans experienced a price gain of 1% or better while just 7% of loans experienced a price decline of 1% or worse.  Lastly, gains were widespread across sectors, with 90% of LLI industries reporting positive July returns. So what drove prices higher in July?  First, one could argue the secondary loan market became oversold after trading off 100 basis points since the end of April despite sound fundamentals.  Second, technical conditions reversed course and supported rising prices for the first time this year.  But the shift in technicals was driven by a lack of net supply, not an increase in demand.  Starting with CLOs, July issuance totaled a six-month low of $9.3 billion.  While still a healthy figure, July’s tally was down more than $1 billion from its last twelve month average.  Couple that with an estimated $3 billion in loan mutual fund outflows, and July visible demand levels totaled just $6.3 billion.  But on the supply side, the size of the LLI contracted for just the second time since January 2018, as repayments surged to a 13-month high of $26.6 billion.  All told, LLI outstandings shrank by more than $10 billion in July.  Added all altogether, July’s visible supply shortage totaled $16.5 billion – the largest discrepancy since March 2015.  It came as no surprise, then, that par-plus market share tripled to 18% in July, equaling 2019’s previous high-water mark achieved in April.

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