The S&P European Leveraged Loan Index, or ELLI, scored another positive monthly return with a 0.27% gain (excluding currency) in June, making it the 15th month in a row that the ELLI has now been in the black. However, the magnitude of the returns has fallen since January and February when the ELLI gained 0.89% and 0.84%, respectively, and from April and May when the readings were 0.45% and 0.43%.
A significant chunk of the ELLI return continues to be generated by the single-B asset class at 0.24% in June, compared to 0.15% for double-Bs. Single-B credits account for the bulk of European transactions (roughly three-quarters of the ELLI), and along with the triple-C portion of the Index they have driven returns over the last 12 months. The single-B subset has returned 8.98%, compared to 5.27% for the double-B subset, while triple-C rated loans outperformed at 24.28%.
The ELLI's year-to-date return stands at 2.96%, which is slightly ahead of May, when it totaled 2.69%. On a rolling 12-month basis the ELLI has returned 9.54% — down from 11.22% at the end of May and 14.14% at the end of April on the same measure. The weighted average bid of the ELLI meanwhile continued to climb above pre-pandemic highs in June, reaching 98.75 at month-end, or nine points above the high of 98.66 recorded in January 2020 before COVID-19 struck European markets.
Looking at the market-value return, which measures the movement in secondary prices for the Index, this reading moved into negative territory in June at -0.4%, with the interest component returning 0.30% to investors for the month. The YTD market-value return stands at 1.09%, behind the interest return at 1.86%. And on a rolling 12-month basis, due to the dramatic appreciation in the Index the market-value return still beats the interest return, at 5.51% to 4.02%, respectively.
Throughout June, accounts reported some selling here and there to make room for new primary deals, however any spare paper continues to be met by a wall of demand with good two-way flows. This is now not just from ramping CLOs, sources say, but also what looks to be a growing bid from specially managed accounts, or SMAs, either seeing inflows or reinvesting repayments. Advancers edged just ahead of decliners on 12 of the 22 trading days on LCD's measure — with an average ratio of 1.76:1 on the days they advanced.
As secondary prices have risen, it continues to be tough for investors to find value, and so demand for pandemic-hit sectors has stayed strong. The discounted space was active across the travel and leisure sectors toward the end of the month, while generally lighter volumes resulted in some gappy moves, but only on limited trading. "Levels can move one to two points better on only a handful of trades simply because the street doesn't have the inventory and we aren't seeing much client selling in these names yet," one trader told LCD.
Although the weighted average bid of the ELLI has recovered to pre-pandemic levels, the pricing distribution of the Index has not. Prior to the pandemic sell-off last year, the month-end high of facilities priced at par and above was 59% at the end of January 2020. The percentage of facilities priced at par or above was only 14% at the end of June 2021, although this bucket did reach a pandemic-era high of 31% at the end of February 2021. The percentage of credits that are distressed — or those priced below 80 — has fallen in June to a mere 0.39%, from 29% at the end of March 2020.
Supply balance tips
The European loan new issuance market has been healthy throughout the year, with total YTD leveraged loan volume coming in at €75.5 billion, a sum already higher than the full-year 2020 total of €64.9 billion, and the highest first-half issuance since 2007, with a big chunk of this supply coming from M&A activity. This backdrop has resulted in the biggest supply surplus in Europe on a rolling-three-month basis since April 2020.
Investments into loans — as measured by European CLO issuance — have outstripped available supply for the last 9 out of 12 months, but with the surge of issuance this year this dynamic could be shifting. LCD calculates net supply by tracking new issues into the ELLI minus repayments, which worked out as €11.1 billion for the second quarter, and with new CLO issuance coming in at €6.9 billion for the 2021 second quarter, this leaves a supply surplus of roughly €4.2 billion for the three months ending June. However, this figure doesn't take into account non-CLO funds in Europe, which also add to demand for the leveraged loan asset class — and indeed investors have told LCD that they have seen more inflows into these funds in recent months.
Repayments have fallen for the month to €2.85 billion, which has helped to boost this surplus, compared to €11.23 billion for May and April's €11.44 billion, which was the highest monthly reading on this measure since the inception of the Index. On a rolling three-month basis, this brings repayments to €25.52 billion.
As for performance by asset class, European loans were in the middle of the pack in June, outperforming equities but underperforming U.S. loans and high-yield bonds.
The ICE BofAML Euro High Yield Index returned 0.62%, while European equities, as measured by the FTSE 100, gained 0.21%.
Year-to-date, however, loans are running behind all the three other asset classes that LCD tracks on a monthly basis.