Thomson Reuters LPC
Leveraged Loan Monthly – March 2018
Contents:
- Leveraged Loan Market Overview
- S. High Yield Bond Market Overview
- Investor Overview
- CLO Market Analysis
- List of recent CLOs / League Tables
- Loan Mutual Fund Flows & Returns
Primary Market:
- In the heels of last year’s headline grabbing volume number, leveraged lending moderated in 1Q, off by 33% when compared YoY. Institutional volume represented 68% of leveraged issuance in the first quarter (compared to a 72% share a year ago). Although lower relative to last year, lending activity remains high and above the average first quarter.
- Despite the busy pipelines, refinancing activity remains the main driver of volumes in 1Q18. New money purposes captured 32% of volume – a higher share than the 25% recorded a year ago, but a drop from the volume of new money activity recorded over the last twelve months. Demand for loans continues to outstrip supply, sending opportunistic borrowers to the market for better terms and pricing.
- 1Q18 institutional issuance stands at $185 billion, 37% below last year’s lofty levels but above the average for first quarters. On the high-yield bond front, March added $25 billion in issuance to take year-to-date volume to $60 billion, $28 billion less than recorded in 1Q17.
- Looking at the drivers of institutional issuance, one-third was driven by new money, compared to 21% a year ago and 31% last quarter.
- Default activity spiked in March, led by iHeartCommunications $6.3 billion default, sending the trailing twelve-month default rate to 2.7%, according to Fitch. There has been $11.9 billion in defaulted par in 1Q18, compared to $7.7 billion a year ago.
Secondary Market:
- Leveraged loan returns were flat in March at 0.27%, taking YTD returns past 1.4%, according to the SP/LSTA LLI. Loan returns are outpacing the 1.2% returned in 1Q17. Open-ended loan funds posted average returns of 0.19% in March, with returns for individual funds ranging from -0.29% to 0.52%. On average, open-ended funds have returned 1.13% year-to-date.
- The average multi-quoted institutional TL advanced 15 bps in March to the 98.7 context. Despite the broader market volatility, average marks are 32 bps higher since the start of the year.
- The share of multi-quote institutional loans priced in the par-plus area stands at 74% for March, with the share priced at or above 101 flat at 7%. At the other end of the price scale, 4% of credits are bid below 90 cents on the dollar.
- Retail loans have underperformed the broader secondary since mid-2016. The average bid for retail credit currently stands in the 95.8 context, up a point since the beginning of the year.
- The average bid on the European Leveraged 40 dropped 16 bps in March to the 99.5 context. Levels have declined 36 bps since the start of the year and sit at their lowest levels since mid-2016.
- HY bond yields widened 24 bps in March to 6.4%, according to the Bank of America Merrill Lynch High-Yield Bond Index. Yields jumped 62 bps since the start of the year, as the average price has declined from 100.6 to 98.5 at the end of March.
CLOs/Loan Funds:
- New-issue CLO activity added $10.7 billion of paper in March and stands at $31.7 billion year-to-date. Volumes so far this year eclipse the $17.4 billion recorded in 1Q17 and the $26.7 billion recorded in 1Q13.
- S. CLO reset and refinancing activity declined in March with $6.6 billion in resets/reissues and $1.4 billion in refinancings. Resets continue to outpace refinancing activity.
- European new issue CLO volume remains strong with €2.5 billion of paper added in March. 1Q17 volume stands at €5.4 billion, compared to €1.2 billion recorded in the first quarter of last year.
- In the European market, three resets priced in March for €972 million. Combined reset and refinancing activity amounted to €4.3 billion in 1Q17.
- Assets under management rose to $518 billion for U.S. CLOs and €77 billion for European CLOs.
- Average DMs on CLO AAA liabilities continue to trend lower. They declined to 98 bps for U.S. BSL CLOs in the month of March.
- According to the most recently available data, high-yield funds suffered a smaller outflow of $2.3 billion in March, after registering a $12.3 billion outflow in February (the second largest on record). Leveraged loans pulled in $2 billion in March and $3.8 billion so far this year as the rising-rate environment draws investors to the floating-rate products.
Breaking loan funds out by their ETF and mutual fund categories, the latter saw the lion’s share of demand so far this year, with inflows of $3.3 billion. ETFs have registered $550 million of inflows, according to the most recently available data.
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