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Leveraged loan break prices dip in busy market; allocations set August record

Contrary to the past several years, the volume of U.S. leveraged loans entering the secondary market in August maintained a healthy pace, despite the typical summer slowdown in the second half of the month. In fact, as measured by volume, it was the busiest August since LCD began tracking the data in 2001, as $33.2 billion freed to trade last month, across 53 deals.

That compares to $17.2 billion in the same month a year prior and $24.2 billion in August 2019. A robust loan market and continued demand for the asset class contributed to a busy first half of the month. While hectic by August standards, the volume of leverage loans hitting the secondary still dropped by over $15 billion from the $48.3 billion in July.

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The average break price for leveraged loans allocating in August dipped again, for the second month in a row, falling 25 basis points to 99.57, from 99.82 in July. It was the lowest monthly average break price since November 2020.

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Meanwhile, investor-friendly flexes continued to increase last month, while the number of issuer-friendly flexes dropped sharply. Pricing on 23% of deals last month flexed wider, an increase from 17% in July, as investors began to push back on some specific credits moving off historically tight terms. The share of deals to flex tighter fell to 23%, from 42% the previous month. That is the smallest percentage of deals to flex in issuers' favor since June 2019.

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Though the share of investor-friendly flexes increased last month, the average size of such flexes actually receded considerably, to an average of 60 basis points, which is down from a hefty 83 bps in July.

The breakdown of deals allocating in August shifted away from higher-rated deals, with the B+ or higher bucket dropping significantly, to 27%, from 47% in July. Deals rated B-minus on at least one side held steady at 38%, compared to 39% in July, and B-flat deals saw a significant uptick, more than doubling in August to 33%, from 14% in July.

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Once in the secondary, loans that allocated in August performed relatively well, dropping just 13 basis points, to 99.44% of par, from the average break price of 99.57, as the secondary market rebounded last month after a soft July. For reference, the S&P/LSTA Leveraged Loan Index posted a total return of 0.47% last month, versus a return of negative 0.01% in July, which was the first month in the red for the index since the market dislocation in March 2020.

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Meanwhile, term loans backing M&A transactions, which accounted for about 29% of deal volume last month, fared marginally better than the overall average. By month-end these term loans dropped just 9 basis points from their average break price, to 99.51.

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In another low of the year, the average new-issue price of deals allocating for trading in August plunged 27 basis points, to 99.02%. A lack of repricings last month, which usually price at or near par, helped keep the average new-issue price down, though with three repricings in August it was not a large departure from July, which only had four.

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The gap between the average new-issue price and the average break price hardly budged, ticking up just 2 basis points, to 55 bps, from 53 bps in July.

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Finally, the average new-issue yield to maturity of loans breaking for trading in August continued to increase, jumping nearly 40 bps to 4.97%, from 4.58% in July. That is the highest yield to maturity since December 2020. Likewise, the average spread to maturity increased 26 bps, to L+406 last month, from L+380 in July. That is the largest month-over-month increase in the spread since June 2019.

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