Monthly US Loan Market Update - December 2018

Dec 5, 2018 | Invesco Fixed Income

Having been a haven from credit market turbulence throughout 2018, senior secured loans finally succumbed to heightened selling pressure in November. On a relative basis, volatility remained muted, preserving senior secured loans’ status as one of the best performing fixed income asset classes year-to-date. Outflows during the month were driven by retail and institutional investors rotating into cash amid weaker overall market sentiment, as well as high yield accounts selling their comparatively liquid loan holdings to raise cash for redemptions. Importantly, this month’s price weakness was a byproduct of weaker market technicals as there has been no deterioration in credit fundamentals.Earnings growth among loan issuers reached a 7-year high of 13% in the third quarter,1 contributing to lower average leverage levels, improved interest coverage ratios, and muted default rates.Overall, loans returned -0.90% for the month, bringing year-to-date returns to 3.06%.2

The softening of loan market technicals in November was driven by retail and institutional account outflows. While collateralized loan obligations (CLO) issuance continued, volume decelerated from prior months as widening spreads on CLO liabilities prompted managers to postpone pricing some new deals. The ‘equity arbitrage’ on new CLOs has become more challenged as liabilities costs have risen, but new issuance is expected to remain strong in 2019 given the abundance of CLO warehouses in progress and the amount of dedicated CLO equity capital that is waiting to be deployed.

As loan spreads widened across the board, the percentage of loans trading above par declined to 3.96% during November. Despite this weakness, loans have materially outperformed fixed rate credit since the beginning of October when this market volatility began. Over that period, loan returns of -0.93% have outpaced high yield returns of -2.54% and investment grade returns of -1.56%.3 Market pressure was heavily influenced by beta — not fundamental weakness — leading to the larger, more liquid names underperforming the broader market. This caused the larger, higher quality “BB” rated issues to underperform “B” rated deals with returns of -0.90% and -0.83%, respectively.4 Meanwhile, “CCCs” were down -1.61% in November.4 The average price in the loan market was $96.80 at the end of November.5 At the current average price, senior secured loans are providing a 7.80% yield inclusive of the forward LIBOR curve.5

1 S&P/LSTA as of Nov. 16, 2018
2 S&P/LSTA Leveraged Loan Index as of Nov. 30, 2018
3 S&P/LSTA Leveraged Loan Index and Bloomberg as of Nov. 30, 2018. High yield represented by BAML US High Yield Index;
investment grade represented by the BAML Investment Grade Index.
4 S&P LCD as of Nov. 30, 2018
5 S&P LCD and Invesco as of Nov. 30, 2018

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