The late-year selloff in the U.S. leveraged loan market has uprooted a dynamic that has dominated the asset class for most of 2018: Precious few bargains in the trading market, as most debt offered to investors was priced at 100 cents on the dollar, or higher.
Now, after broader economic concerns in December grounded the high-flying market, loan bids are more evenly dispersed across various pricing levels, with some market pros seeing opportunity.
To be sure, loan prices have defied gravity until recently. Even at the end of 2018’s second quarter—following a period of excess supply in market, when the share of par-plus deals fell below 30%—half of the issues comprising the S&P/LSTA Loan Index remained in a lofty 99-to-100 price level. And by the end of September the market had strengthened, with 64% priced over par and 19% at 99-par, according to the Index.
Following the November/December sell-off, however, the pricing distribution resembled a bell curve, with only the 95–96 category accounting for more than 20% of the Index, and the bulk of constituents bid between 95 and 99. Less than 1% of loans belonged to the par-plus bucket, the lowest such share since April 2009.
While there remains concern about the sudden slide, a number of market players note that the newfound pricing distribution can be seen as something approaching normal, compared to an asset class were pretty much every issue is skewed toward par, perhaps indiscriminately.
One CLO manager, for example, deemed the recent market move as a “healthy repricing of risk,” while another said they had been finding better opportunities across the leveraged loan secondary over the past month or so.
CLOs, or collateralized loan obligations, are the biggest investor component of the roughly $1.15 trillion U.S. leveraged loan market (that number excludes revolving credits and amortizing term loans, which are syndicated to banks).
How long this newfound pricing dynamic holds remains to be seen. So far this year U.S. leveraged loans have rebounded 1.21% – a spectacular jump for asset class – though longer-term, market players continue cautious, especially as the prospects of additional interest rate hikes lessen and the effects of the market’s considerable covenant-lite outstandings loom.
This analysis was taken from LCD News stories written by Marina Lukatsky, Andrew Park and Tyler Udland.
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