October 3, 2023 - So here is what we do know: Loans have reaffirmed their ability to outperform during rising rate environments – up more than 10% in 2023. Moreover, while returns have been positive up and down the capital structure this year, the loan market is the only major asset class to produce a positive cumulative return since the Fed started raising rates back in March of last year.
At next week’s LSTA Annual Conference, Ted Basta (LSTA), Alex Naboicheck (Bank of America), Bradley Rogoff (Barclays Capital), Todd Rothman (J.P. Morgan), Jeff Warren (Goldman Sachs), Carly Wilson (BlackRock), and Tommy Wong (Oak Hill Advisors) will discuss the latest trends in the broadly syndicated loan (BSL) primary and secondary markets – with an eye towards dissecting all things we don’t know as we close out 2023 and look forward to 2024.
It has become increasingly evident that all things begin with the Fed and the longer-for-higher rate environment argument. While the broader markets enjoyed notable rallies across most of the summer, we witnessed the S&P 500 turn out its worst performance of the year in September on renewed rate concerns. (This despite a sizeable rally at month end driven by cooler-than-expected inflation data.) Volatility is clearly spiking as we enter the fourth quarter with headlines moving markets sharply in either direction. And the loan market will not be immune to the headline risk.
In looking back across the third quarter, the BSL market made substantive gains from various vantage points, but still lagged in others. Despite giving back gains recently in the secondary, prices closed the quarter on a four-month run (albeit on historically low trade activity). Much of those previous gains were attributed to a resurgent CLO market, which still finds itself roughly 20% shy of last year’s issuance figure. At the same time, loan mutual fund and ETF outflows have dissipated, but retail investors remain cautious and are yet to begin allocating meaningful dollars back to the loan market. And while existing investors have benefited from rising base rates (and the double-digit yields which followed), loan borrowers have become increasingly stressed, despite a default rate that remains below 2%, according to the Morningstar/LSTA Leveraged Loan Index (LLI). That said, credit concerns appear to be mounting, which makes credit picking quite difficult and ever more important for portfolio managers.
And then there’s the primary market, which proved to be resurgent during the third quarter, with overall volumes (and M&A activity) hitting six-quarter highs. In actuality though, primary activity was mostly driven by a sizeable uptick in refinancing activity alongside extensions and re-pricings via amendments. In turn, LLI outstandings have actually dropped.
Where do we go from here is the question, so please join us as we discuss the path forward for the BSL market. The agenda (and registration) are available here – we hope to see you next week!