Monthly US Loan Market Update - June 2018

Jun 13, 2018 | Invesco Fixed Income

 

Senior secured loans delivered positive returns of 0.17% in May as modest price erosion was offset by coupon income. This brought year-to-date returns up to 2.04%.1 Loan prices moderated amid an uptick in new supply that prompted a rotation of funds out of the secondary market. During the month, the percentage of loans trading above par fell from 74% to 55.4%.8 The softer price environment was primarily driven by technicals, as loans were largely undisturbed by marketcontagion from Italy’s political developments. Meanwhile, market fundamentals have remained robust as evidenced by a strong first quarter earnings season in which loan issuers’ earnings growth rose to 9.25%, up from 5% in the prior quarter.2

As May’s new issue supply grew from April’s levels, underlying demand for the asset class remained solid, driven primarily by a continued bid from new CLO creation. With good base demand for the asset class, repricing and refinancing activity continued during the month, however lender pushback was increasingly effective. Both the volume of repricings and the average spread reductions have declined in 2018, and May saw some repricings attempts fail due to lack of market acceptance. In April and May, the average spread reduction from repricings diminished to 42 basis points, with over half of repricing issuers seeking a 25 basis point reduction; this compares to an average of 56 basis points in the first quarter, with just 27% of issuers pursuing a 25 basis point reduction during that period.10 This indicates that repricing activity, though still an ongoing theme in the loan market, has reached a healthier balance.

The loan market continued to outperform the High Yield Bond Index, which returned -0.02%.3 Meanwhile, the High Grade Bond Index returned 0.45%3 and the 10 year Treasury returned 1.11%, as yields decreased by approximately 9 basis points to 2.86%. Loans’ lower yielding, higher quality “BB” (0.02%) and “B ” (0.16%) ratings categories lagged “CCC’s” (1.14%).4 The average price in the loan market was $98.34 at the end of May.5 At the current average price, senior secured loans are providing a 6.77% yield inclusive of the forward LIBOR curve.6

1 S&P/LSTA Leveraged Loan Index May 31, 2018
2 S&P/LSTA Leveraged Loan Index May 31, 2018
3 BAML High Grade Corporate Bond Index, BAML HY Master Index May 31, 2018
4 S&P/ LCD May 31, 2018
5 S&P LCD May 31, 2018
6 S&P LCD and Invesco as of May 31, 2018
8 JP Morgan May 31, 2018
10 LevFin Insights May 31, 2018

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