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US leveraged loan market claws back some losses after brutal March

Leveraged loans continue to bounce back from a horrendous March, with the partial rebound corresponding to improvements in the broader credit and financial markets, stemming from the first round of the Federal Reserve’s quantitative easing announcements to combat economic dislocation caused by the coronavirus pandemic.

Of particular note, the share of the $1.2 trillion in outstanding U.S. leveraged loan debt that is categorized as distressed — meaning priced at less than 80 cents on the dollar — has dropped to 20%, from a recent high of 57% last month, according to the S&P/LSTA Leveraged Loan Index.

As well as the Fed actions, the loan market rebound comes as investors find value in higher-quality, better-rated speculative-grade loan issues that plummeted alongside riskier names during the March market upheaval, sources say.

Breaking down the current U.S. leveraged loan market, by price levels:

The share of S&P/LSTA Index constituents priced below 90 eased to 45% at the April 9 close. This share stood at 60% at the week ended April 3, and as high as 95% in the week ending March 20.

At the end of 2019, only 10% were priced below this level.

For a 16th consecutive session, on April 9, no loans were priced above par.

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Returning to loans below 80, the clinical level signifying distress: 20% of the loan market is now priced below this level, down from 25% the previous week.

Highlighting the recent volatility, this share ballooned to the post 2007-08 financial crisis high of 57% on March 23.

At the end of 2019, just 4% of loans were priced below 80.

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The share of loans in deeper distress, below a price threshold of 70, is at 10%, nearly unchanged from the previous week but well above the 2% at the end of 2019.

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This analysis was written by Rachelle Kakouris, a Director in LCD's Research group.

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