Senior secured loans delivered positive returns of 0.12% in June, bringing year-to-date returns up to 2.16%1. A spate of new supply came to market in June ahead of the usual summer slowdown, pressuring loan prices for a second consecutive month. As investors rotated capital out of the secondary market for redeployment in the busy primary calendar, loan prices moderated, particularly towards month end. Adding to this looser technical environment in loans was a tepid risk appetite across capital markets amid ongoing trade war-related headline risk. June saw the percentage of loans trading above par fall even further, from 55.4% to 20.1%, the lowest level since July 2016. Despite the optics of mild loan price declines, credit fundamentals remain strong due to broad-based earnings growth and supportable leverage metrics among the universe of borrowers.
As June’s new issue supply swelled, underlying demand for the asset class remained in place, albeit slower than in prior months. The excess supply situation in June further dampened repricing and refinancing activity and bolstered lenders’ ability to negotiate both on pricing and documentation. The ratio of issuerfriendly price flexes to investor friendly price flexes was 1.1x in the second quarter, down substantially from 6.8x in the first quarter,2 indicative of a healthier balance in the loan market as prices have relaxed.
The loan market underperformed the High Yield Bond Index, which returned 0.33%, but outperformed the High Grade Bond Index, which returned -0.55%3, and the 10 year Treasury, which returned -0.02%, as yields were flat at 2.86%. Loans’ lower yielding, higher quality “BB” (0.03%) and “B” (0.16%) ratings categories lagged “CCC’s” (0.80%)4. The average price in the loan market was $97.97 at the end of June5. At the current average price, senior secured loans are providing a 6.97% yield inclusive of the forward LIBOR curve.6
1 S&P/LSTA Leveraged Loan Index June 30, 2018
2 S&P/LSTA Leveraged Loan Index June 30, 2018
3 BAML High Grade Corporate Bond Index, BAML HY Master Index June 30, 2018
4 S&P/ LCD June 30, 2018
5 S&P LCD June 30, 2018
6 S&P LCD and Invesco as of June 30, 2018
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