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After recent surge, US leveraged loan prices reach pre-pandemic levels

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After recent surge, US leveraged loan prices reach pre-pandemic levels

With the U.S. leveraged loan secondary market off to a strong start in 2021 — continuing the trend established in the second half of 2020 — the share of loans in the S&P/LSTA Leveraged Loan Index priced at 100 or better has skyrocketed to its highest level since February 2020.

The share of loans in the index priced at par or above as of Jan. 12, reached 41%, its highest level since the 42% on Feb. 7, 2020, when markets worldwide began to feel the effects of the coronavirus pandemic. The par-or-better figure held near 0% for about three months until it slowly began to lift in early June 2020. It reached 12.5% by the end of the year, after first hitting the double-digit mark in mid-December.

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As the share of loans in the index priced at par or above continues to rise, the distribution of bids in the index is shifting dramatically from just a few months ago.

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Notably, the distress ratio, defined as the share of loans in the index priced below 80, has dropped to just 1.85%. The ratio reached as high as 56.8% during the height of the market turmoil in late March. It has steadily declined since then and ended 2020 at just 2.2%.

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After the precipitous drop in the secondary loan market, starting in late February 2020 and lasting through late March, the S&P/LSTA Leveraged Loan Index steadily climbed during the second half of 2020 and has continued its ascent into 2021. The $1.2 trillion U.S. leveraged loan market returned 3.12% for the year in 2020 and a whopping 29.02% from the March 23 nadir through year-end.

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So far this year the index has returned 1% (through Jan. 12). While the strong start to the year is not unprecedented for the index, it is the fifth-best start to a year through Jan. 12, stretching back to 2008.

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Additionally, the average bid of the S&P/LSTA Leveraged Loan Index has now reached 97.17 as of Jan. 12, its highest level since the index was at 97.29 on Jan. 26, 2020. The current level is now above the average over the year prior to the market collapse, from March 2019 through February 2020, of 96.61. In fact, the average bid of the S&P/LSTA Leveraged Loan Index has only been as high as it is now 33% of the time since the index started pricing on a daily basis in April 2007.

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Given the strong start to the year in the secondary market and rapid rise in the share of loans priced at par or above, the U.S. leveraged loan new-issue market has seen a surge in repricing transactions, which had been largely absent since the reopening of the market in late April. In a leveraged loan repricing, issuers return to market to reset a Libor spread on a credit, taking advantage of investor demand, rather than fully refinancing a transaction. Six such deals have already launched so far this year, a trend likely to continue if the firm secondary conditions hold. There were just three repricings in the last 10 months of 2020, with no such deals from the end of February until late October.

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