The U.S. leveraged loan market downshifted in 2014′s third quarter, prompting yields to rise. Things looks pretty much like this:
Despite strong CLO issuance,
… a combination of record retail outflows …
… and a spike in M&A volume …
… pushes clearing yields higher again.
Opportunistic activity falls as a result …
… putting a damper on volume.
These charts are from a quarterly wrap, courtesy S&P Capital IQ/LCD’s Steve Miller.
For lots more charts, news and stats on the leveraged loan market check out LeveragedLoan.com, a free site powered by LCD to promote the asset class.
After gaining 0.15% in August, the S&P/LSTA Leveraged Loan Index fell 0.60% in September, its worst monthly performance since June 2013. September’s setback dropped the year-to-date return for the S&P/LSTA Index to 2.11%, from 2.73% at the end of August.
Loans were hardly the only asset class to feel the pain in September. Risk assets broadly were dented by geopolitical concerns. As well, expectations for rising rates pushed the 10-year Treasury yield up 17 bps, to 2.52% on Sept. 30, from 2.35% at the end of August, according to the Department of the Treasury. As a result, loans outperformed equities as well as the three fixed-income categories we track here monthly.
This analysis is taken from S&P Capital IQ/LCD’s 3rd-quarter data wrap-up, available to LCD News subscribers here. Also detailed in that story:
- Monthly loan returns, per the S&P/LSTA Index
- Annual returns, per the Index
- Loan returns by rating
- Loan outstandings
- CLO issuance
- Leveraged loan trading prices
- Loan M&A forward calendar
Europe saw the bulk of the action this week, pricing three new CLO transactions, against two for the U.S. market. The ABS East conference, taking place at the start of the week, dampened new-issue activity stateside, leaving the European CLO market to step into the spotlight on two counts: supply and spreads.
LCD subscribers can click here for full story, analysis, and the following charts:
- Deal pipeline
- US arbitrage CLO issuance and institutional loan volume
- Global CLO volume
. - Sarah Husband
In the third quarter, the investor base for new-issue leveraged loans grew even more dependent on CLO funding amid (1) retail outflows from loan funds and (2) ongoing reticence by banks and securities firms to play in loans in which they don’t have an arranger role.
Banks, in fact, were again bit players during the first three quarters of 2014, taking a record-low 9.9% of non-arranger allocations to leveraged loans, according to LCD’s analysis, down from 14.1% in 2013. Banks’ share in the third quarter was in line, at 9.8%.
LCD subscribers, please click here for full story, analysis, and the following charts:
- Share of institutional volume rate four-B or higher
- Number of loan investor groups
- Visible inflows to the loan asset class
- Primary market for institutional loans
- Average AAA CLO spread
- Share of S&P/LSTA Index bid below par and single-B YTM
- Repricing volume
- Primary market for institutional loans
- Relative-value players’ share of allocations and high-octane volume
- Primary allocations of 2014 institutional loans by investor type
- Number of managers that issued a 2.0 CLO
- Average CLO size
- CLO and Index outstandings
- CLO outstandings as a share of S&P/LSTA Index
- CLO outstandings
- Assets under management 2Q 2014
– Steve Miller
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Cash outflows from bank loan funds totaled $382 million during the week ended Sept. 24, narrower than $583 million in outflows last week, but a slight uptick from the $341 million outflow recorded two weeks ago, according to Lipper.
The influence of bank-loan ETFs on this week’s number was 12%, or $48 million. This compares to an outflow of $16 million from ETFs last week.
There now have been 22 weeks of outflows over the past 24 weeks, for a total outflow of $11.9 billion over that span, which follows a record-shattering 95-week inflow streak that totaled $66.7 billion.
The trailing four-week average gaps out slightly to a negative $435 million per week, from negative $414 million last week. This measure remains below the recent peak of negative $858 million from the week ended June 11.
The year-to-date fund-flow reading pushes deeper into negative territory, at $4.8 billion, based on a net withdrawal of $5.2 billion from mutual funds against a net inflow of $395 million to ETFs. In the comparable year-ago period, inflows totaled $44 billion, with 11% tied to ETFs.
The change due to market conditions was negative $217 million, versus total assets of $102.4 billion at the end of the observation period. The ETF segment comprises $8 billion of the total, or approximately 8%. – Joy Ferguson
With a negative bias creeping back into the market, the average bid of LCD’s flow-name composite slid 16 bps in yesterday’s reading, to 98.36% of par, from 98.52 on Sept. 18.
Among the 15 names in the sample, eight declined, one advanced, and six were unchanged from the previous reading. Fortescue andIntelsat were the largest decliners, with each falling half a point, to be bid at 98.5 and 98.75, respectively, in today’s reading.
With the allocation of the $6.75 billion TLB for Burger King expected within the coming days, not to mention another $760 million of BWIC supply hitting the market today, the secondary loan market has cooled. With today’s drop, the average bid is at its lowest level since July 2, 2013.
Accounts remain focused on the new-issue market, and Burger King’s deal in particular, as the fast-food chain’s deal would be the largest loan to allocate since Hilton Worldwide’s $7.6 billion term loan in September 2013.
With the average bid dropping 16 bps, the average spread to maturity rose three basis points, to L+437.
By ratings, here’s how bids and the discounted spreads stand:
- 98.89/L+397 to a four-year call for the 10 flow names rated B+ or higher by S&P or Moody’s; STM in this category is L+388.
- 97.3/L+554 for the five loans rated B or lower by one of the agencies; STM in this category is L+536.
Loans vs. bonds
The average bid of LCD’s flow-name high-yield bonds fell 46 bps, to 103.02% of par, yielding 6.18%, from 103.48 on Thursday. The gap between the bond yield and discounted loan yield to maturity stands at 185 bps. – Staff reports
- September: The average flow-name loan is down 73 bps from the final August reading of 99.09.
- Year to date: The average flow-name loan is down 157 bps from the final 2013 reading of 99.93.
- Bids fall: The average bid of the 15 flow names slipped 16 bps, to 98.36% of par.
- Bid/ask spread widens: The average bid/ask spread rose five basis points, to 39 bps.
- Spreads rise: The average spread to maturity – based on axe levels and stated amortization schedules – rose three basis points, to L+437.
Loans lost 0.07% today after losing 0.01% yesterday, according to the LCD Daily Loan Index.
The S&P/LSTA US Leveraged Loan 100, which tracks the 100 largest loans in the broader Index, lost 0.11% today.
In the year to date, loans overall have gained 2.54%.
A full xls of the Daily Index is available to LCD subscribers, please click here.
LCD’s Loan Market Primer has been updated to include a detailed Index of items not already included in the main interactive menu, as well as a Glossary of loan market terminology.
As always, the Primer is free to all, as is LeveragedLoan.com, an LCD-powered site developed to promote the leveraged loan asset class.
The online Primer is a digital version of the print Primer LCD has long distributed to arranging banks, leveraged loan investors and other institutions, law firms and business schools with an interest in the leveraged finance market space (you can download the print version here).
Both versions of the Primer are updated with new content as the loan market evolves, and the online version includes a Market Almanac detailing key loan stats and trends, both current and historical.
For more free leveraged finance news and analysis check out HighYieldBond.com (there’s a Primer there, too).
Again, the Primers, LeveragedLoan.com and HighYieldbond.com are meant to promote the leveraged finance asset class, so please share them with anyone who might find them useful.
Cash outflows from bank loan funds grew to $583 million during the week ended Sept. 17, wider than respective outflows of $342 million and $435 million in the previous two weeks, according to Lipper.
The influence of bank-loan ETFs on this week’s number was just 3%, or $16 million. This compares to an outflow of $70 million from ETFs last week.
There now have been 21 weeks of outflows over the past 23 weeks, for a total outflow of $11.4 billion over that span, which follows a record-shattering 95-week inflow streak that totaled $66.7 billion.
The trailing four-week average gaps out slightly to a negative $414 million per week, from negative $404 million last week. This measure remains below the recent peak of negative $858 million from the week ended June 11.
The year-to-date fund-flow reading pushes deeper into negative territory, at $4.4 billion, based on a net withdrawal of $4.9 billion from mutual funds against a net inflow of $442 million to ETFs. In the comparable year-ago period, inflows totaled $43 billion, with 11% tied to ETFs.
The change due to market conditions was a negative $117 million, versus total assets of $103.0 billion at the end of the observation period. The ETF segment comprises $8 billion of the total, or approximately 8%. – Joy Ferguson
In a year when CLO issuance is booming and retail flows are negative, it’s surprising to note that the share of outstanding institutional loans held by structured-finance vehicles actually has declined, easing to 43.4% (as of Sept. 11), from 44.8% at the end of 2013. By dollar amount, that’s $343.1 billion (according to Wells Fargo CDO analyst David Preston) of the $790.1 billion in the S&P/LSTA Index.
This analysis is part of a longer LCD News story that also details CLO issuance, as a share of LSTA Index leveraged outstandings, structured finance outstandings – CLO 1.0 vs. 2.0 – and near-term possibilities regarding CLOs that will be called.
For more on how the CLO market works check out LCD’s online Loan Market Primer. It’s free, of course.