Leveraged Loan Monthly – U.S.: January 2019

By Hugo Pereira and Elizabeth Han

The January 2019 ediiton of LPC’s Leveraged Loan Monthly is now available for download on LoanConnector and LC Reports.

Contents:

  • Leveraged Loan Market Overview
  • US High Yield Bond Market Overview
  • Investor Overview and Fund Flows
  • CLO Market Analysis
  • CLO League Tables
  • 2019 CLO Activity

Primary Market

  • 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 January 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.
  • In January 2019, HY bond volume recovered from December 2018’s sharp drop in volume of $594 million, with $17.9 billion of new issue over 18 deals. This is the highest volume since October 2018’s $18.2 billion level. HY returns jumped to 4.59% for January, its first positive return since September 2018’s return of 0.55%. Institutional loan issuance was $12.22 billion, down from $17.63 recorded in the prior month and the lowest volume since March 2016.
  • Average primary market yields for large corporate declined to 7.33% in January from 7.85% the prior month. They also declined to 6.68% from 10.02% a month earlier for middle-market borrowers. After increasing last year, 3-month LIBOR ticked down 6bps to 2.74% at the end of January.
  • Four institutional loan deals flexed upwards in January 2019, with the average flex at 42bp. 7 deals flexed downwards, with an average flex amount of 71bp. A stark contrast to the prior month’s flex activity, this indicates some recovery in the primary market from the last months of 2018.
  • Leveraged loans crossed the trillion-dollar mark this year as the asset class grew 20% in 2018 to record levels, compared to 8% in 2017. Institutional loan outstandings ended December at US$1.147 trillion.

Secondary Market

  • Leveraged loan returns rebounded in January, posting a return of 2.55%, according to the SP/LSTA Lev Loan Index. 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.

CLO and Loan Funds

  • Despite a slowdown in the leveraged loan market, CLO activity picked up in January, albeit all new deals priced in the last week of the month. 10 deals priced for a total of $5.1 billion of volume, not far from the 11 deals and $6.6 billion volume that priced in the first month of 2018. Price discovery and spread widening likely caused the delay in issuance.
  • Refinancing and reset activity continued to stagnate as spreads continued to widen in the first month of 2019. In January 2019, there was $49 million of refinancings, $1.19 billion in resets and no reissues, in contrast to $13.8 billion of activity in January 2018. Full-year 2018 repricing activity recorded US$83.8 billion in resets, US$35.4 billion in refinancings and US$31.2 billion in reissues – a dramatic shift from 2017, when refinancings dominated.
  • Average AAA DMs ticked higher in January to 134.6, continuing the widening trend that started almost 1 year ago in February 2018. The average AAA DM has not been this high since February 2017, when average AAA DMs were 133, and 145 in the month prior. In 2018, spreads tightened from 145bp to 113bp during the course of the year.
  • In a distribution of CLO portfolio prices, less than 3% of U.S. CLOs have a WAB at or above par, with 94.8% showing a WAB between 93 and 96. Compare this with 3.2% of CLOs showing a WAB between 93 and 96 just one month ago. In European CLO portfolios, only 0.4% of CLOs had a WAB between 99 and par, compared to 56% 2 months ago.
  • Outflows continue to send the AUM (market value) for loan mutual fund and ETFs lower to $147 billion at the end of January. AUM has dropped 16% in the over the last three months.

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.