Concerns about the rise in coronavirus cases fueled by the delta option caused widespread ripple in financial markets in July, including for floating rate debt. On July 19 alone, the S & P / LSTA Leveraged Loan Index lost 0.11%, the largest daily decline since November 2020. US loans fell 0.01% for all of July, the worst since the March 2020 pandemic-triggered recession. Term loans providing companies and industries hardest hit by the COVID-19 pandemic have been hit harder, pushing some corners of the market even deeper.
The 0.01% negative move was only the second negative reading for the $ 1.26 trillion asset class in the past 16 months (loans lost 0.002% in March 2021). On average, over the past 12 months, loans have grown by 76 basis points per month. The index has risen more than 22% since the end of March 2020, although growth has slowed in 2021. In the first seven months of the year, US loans rose 3.27%.
Lower secondary prices triggered losses in July. The market value component of total income, which measures changes in secondary prices, fell 0.35% in July, the largest drop in 16 months. This is the second negative reading this year and the third since March 2020.
Indeed, the index’s average rate has risen almost continuously since April last year, reaching a pandemic-period high of 98.42 on June 12. Over the past 16 months, the weighted average rate has decreased only three times compared to the previous month. and the 34 basis point drop in July marks the biggest loss since March 2020. However, the current reading of 98.04 is 49 basis points higher than the end of the first quarter and nearly two points higher than the end of 2020 (96.19). …
The Leveraged Loan 100 Index, which covers the 100 largest and most liquid companies in the credit market, lost 0.24% in July based on overall returns, the third negative value in the past 12 months. On average, these large companies have added 0.55% per month over the past 12 months. The market value component of LL100 lost 54 basis points last month, for the second straight period in the red.
Assessment of credit market indicators by credit quality indicates a deviation from the latest trends. For the first time in 15 months, the CCC sub-index lost to the higher-rated BB and B sub-indices. Moreover, with a 0.26% loss in July, the triple Cs fell in negative territory for the first time after falling 22.2% during the pandemic-triggered downturn in March 2020 of the year. In the 15 months following this precipitous decline, the CCC sub-index gained 42.7%. Despite the latest setback, Triple-C shares are up 9.73% year-to-date, the highest in the first seven months of the year since 2010.
The triple C loan cohort is much smaller than the higher-rated segments, including 180 institutions, compared to 279 for double B and 847 for single B, and tends to be more volatile given the often stressed status of its constituents. A drastic change in the price of one name can cause significant fluctuations in overall profitability. In fact, the top five names in the cohort together account for approximately 21% of the total nominal outstanding debt tracked by this sub-index. For reference, in the broader S & P / LSTA leveraged leverage index, the top five companies accounted for just 3.14%.
In addition to credit-related problems that affected CCC’s profitability, sector concentration played a role in July. The leisure sector accounts for approximately 9% of the CCC sub-index, including borrowers such as cinema operator Cineworld Group PLC and Equinox fitness clubs. This is a much higher concentration than in the credit market as a whole – 3.8%.
Of course, the pandemic-fueled sell-off last month due to the growing number of delta cases has had a greater impact on borrowers in the leisure sector, putting the industry on the bottom. It was the sector’s first negative yield in nine months following the positive news about the Pfizer Inc. vaccine. last November. Overall, from November 2020 to June 2021, vacation loans increased by 13.4%.
Likewise, the air transport industry, which includes American Airlines Group Inc. and United Airlines Holdings Inc. fell 59 basis points last month, the worst in 12 months and only the second time in the red in that period. Since the vaccine news broke last November, the sector has grown by about 15%.
Decrease in yield
Despite the decline in secondary prices, the profitability of the secondary market remains close to record lows. According to the Index, at the end of July, the average yield to maturity was 4.30%, just a few basis points above the all-time low on June 11 of 4.21%. A year ago, index loans had an average return. 6.11%, and at the beginning of 2021 – 4.70%. At the same time, the average discounted spread to maturity, which takes into account the bid price and the nominal spread on the loan, has hovered around L + 400 over the past three months, compared to L + 443 at the beginning of the year and about L + 530 a year ago.
Declining yields across the board continue to fuel investor demand for lower-rated (and higher-yielding) securities. In fact, while the double B discounted pre-maturity spread is currently higher than it was before the pandemic, the double B and triple C cohorts are within it. At the end of 2019, double Bs were L + 273; they are currently L + 305. At the same time, the single-B sub-index is now almost 17 basis points less than at the end of 2019 (L + 423 vs. L + 440), while the triple Cs is more than four points less (L + 789 versus L +1 233).
Market technical conditions continued to favor borrowers in July as measurable loan demand again exceeded supply. LCD measures net loan as the change in outstanding debt, according to the S & P / LSTA index, or as newly issued loans joining the index, minus disbursed loans. LCD defines investor demand as a CLO issue coupled with cash inflows / outflows from retail investor loans.
Starting with Supply: The face value of outstanding debt tracked by the index rose another $ 3.3 billion in July to $ 1.26 trillion, a new record. The index rose for five consecutive months to $ 75 billion, the largest increase in any comparable period since February 2019. This means that the growth rate has been 6.3% since the end of February 2021. The loan market grew by only 0.5% as a whole. 2020.
M&A-related emissions, usually translated into pure supply, set a new record in July at $ 38.8 billion, surpassing the previous record set just a month earlier ($ 37.5 billion). Around 82% of July activities were funded by $ 31.9 billion in debt from companies backed by private equity, also a record high. Sponsored M&A issues are the fastest growing since the global financial crisis, with $ 147.6 billion issued through July 31, accounting for 75% of total M&A (which is also a record pace this year).
Despite the fact that the issue increased in July, the redemptions also increased, which significantly reduced the total nominal amount of outstanding debt. About $ 33.6 billion in loans were disbursed last month, a three-month high, up from $ 25.3 billion in June and a 12-month average of $ 25.7 billion.
Let’s turn to demand. Again, LCD defines investor demand as CLO issuance combined with cash flows to US loan funds. The CLO US market in July was calm by current market standards, although it is still on track to break a year’s record. With a car price of $ 9.3 billion, July was the second slowest month this year, well below the $ 13.7 billion average in the first half of 2021. However, it followed two record quarters, increasing its year-to-date output to $ 91.7. billion.
At the same time, retail credit investors continue to pursue the floating-rated asset class, although growth has slowed. According to Lipper’s weekly reporters, net capital inflows in the 28 of the 30 weeks to July 28 were $ 21.6 billion. An outflow of $ 67.1 million for the week ending July 21 interrupted a streak of 27 direct weekly gains for the asset class. In the four weeks to 28 July, inflows totaled $ 1.3 billion, the lowest this year, compared with 3.2 billion in June and 3.7 billion in May.
More broadly, LCD estimates retail lending inflows in July at $ 1.8 billion, for the eighth straight month. These retail lending funds and $ 9.3 billion in CLOs have invested $ 11.1 billion, the lowest level of investor demand this year. In the first half of the year, investor demand averaged $ 18.4 billion per month.
The combination of a $ 3.3 billion increase in debt (supply figure) with $ 11.1 billion in measurable demand leaves the market with a $ 7.8 billion supply deficit, up from $ 8.4 billion in June. Overall, measurable demand exceeded supply by $ 63 billion in 2021, up sharply from $ 22.6 billion at the time in 2020.
Other asset classes
In July, leveraged loans came to the bottom of the list for the second consecutive month, based on all LCD asset class tracks for this analysis. However, with the exception of stocks and 10-year Treasuries, all other asset classes performed lower in July than in June. From the beginning of the year to date, the loans yielded to equities and high-yield bonds, but outperformed high-grade bonds and 10-year Treasuries.
Loan issuers in the industries hardest hit by COVID-19 were among the leaders in the fall in July, as concerns over a growing delta option weighed on stocks, which recovered the most from the resumption of trading. Movie theater operators Cineworld and AMC Entertainment Holdings Inc. last month entered the top five largest issuing companies that are falling in price. AMC’s term loan maturing in April 2026 (L + 300, 0% lower limit of Libor) fell to 88.5 / 89.5 by the end of the month from 93.75 / 94.75 in early July, while Cineworld’s largest term loan with maturity B is due to be repaid. February 2025 (L + 250, the lower limit of the Libor rate of 0%) fell to 80.5 / 82 by the end of the month from 87.875 / 88.875 at the beginning of the month. Airlines were also hit in July, with American Airlines and United Airlines among the top ten falling.
Among the most successful in the past month were the lower-rated loans, despite the fact that the triple-C portion of the index was generally inferior to its higher-rated peers. Term loans for Exela Technologies, Revlon, and Clark the American were among the leaders of July.