Monthly US Loan Market Update - February 2019

Feb 12, 2019 | Invesco Fixed Income

The senior secured loan market began 2019 on a strong note as December’s technical selling pressure abated and asset class fundamentals came back into focus. Loans entirely retraced December’s losses as prices staged a rapid recovery in the opening days of January, contributing to a 2.55% monthly return.1 Investor sentiment improved markedly in the first weeks of the year following the Fed’s pivot to a more accommodative monetary posture, apparent progress in US-China trade negotiations, and a positive start to earnings season. Reduced risk that the Fed might hasten a recession by raising interest rates too quickly, combined with new evidence that the economy and corporate earnings remain fundamentally healthy created a tailwind for loans that supplanted the technical weakness which had dragged prices lower at the end of 2018.

Outflows continued in January, however the milder pace of retail withdrawals and green shoots of renewed CLO issuance helped stabilize the market technical. With CLO asset spreads widening more than liability spreads at the end of 2018, the improved economics of CLO formation prompted some managers to begin coming off the sidelines by month end as the loan market rallied. Meanwhile, new issue supply remained limited in January as the pipeline of new deals only started building towards the end of the month.

Despite the price rally, the percentage of loans trading above par remained under 1% at the end of January. Roughly half of the market was trading within two points of par by the end of the month, compared with just 10% at the end of December.1 Recall that December’s price weakness was driven more by technical factors than by fundamental credit concerns, which caused the larger, more liquid and higher quality names to underperform the broad market. This dynamic reversed in January, causing the largest 100 loans to outperform the broader loan market by 101 basis points.2 From a quality perspective, “BBs” (3.13%) outperformed “Bs” (2.44%) and “CCCs” (1.07%) during the month.2 The average price in the loan market was $96.08 at the end of January.3 At the current average price, senior secured loans are providing a 7.56% yield inclusive of the forward LIBOR curve.3

1 S&P/LSTA Leveraged Loan Index as of Jan. 31, 2019.
2 S&P LCD as of Jan. 31, 2019.
3 S&P LCD and Invesco as of Jan. 31, 2019.

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