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Leveraged Loan Returns Rebound to Nearly 3-Year High in Secondary Market

February 11, 2019, 09:00 AM
Filed Under: Leveraged Lending

Leveraged loan returns in the secondary market rebounded in January, posting a return of 2.55%, according to the SP/LSTA Lev Loan Index, released by Thomson Reuters LPC. After ending 2018 with three straight months of negative returns, January returns were the highest in almost three years. Open-ended loan funds returned on average 2.31% in January.

After plummeting 377bp over the last two months of 2018, average bid for multi-quoted institutional loans gained 134bp in January. Secondary levels rebounded early in the new-year, and have since been range-bound in the 96 context.

The share of loans average bid in the 98 to par range increased in January to 50%, from 22% a month ago, while the share marked between 90 and 98 decreased to 40%, from 68% the prior month. The par plus share ticked higher to 2%, while the share priced below 80 declined one percentage point to 3%. On a dollar-weighted basis, 56% of loans are priced in the 98 to par range, it was 11% a month ago.

After finishing the year at multi-year high of 7.9%, high-yield bond yields rallied by a point in January to finish the month in the 6.9% context.

Two issuers defaulted on their loan debt in January 2019, with API Heat Transfer ThermaSys Corp completing a distressed exchange and Shopko Stores filing Ch. 11, the latest retailer to default. The TTM default rate was 1.5% at the end of January, down from 2.4% a year ago and at its lowest level since January 2016, according to the Fitch U.S. Leveraged Loan Default Index.

Leveraged loan issuance started 2019 tentatively, with $24.3 billion of leverage loan volume, broken out between $13.2 billion of pro rata leveraged issuance and $11 billion of institutional leveraged issuance. This is a 66% decline from December 2018’s volume of $72 billion, and a 63% decline from issuance 1 year ago. The first month of 2019 is the lowest issuance volume since Jan 2012’s $20.8 billion level. January saw the longest government shutdown in history, continued outflows from retail loan funds and the Fed signaling a patient stance towards further rate hikes in 2019.


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