Bank Loans: Favorable Technicals Lift Prices
Secondary loan prices rose in the second quarter on the back of robust CLO demand.
As of the end of the second quarter, bank loan mutual funds and exchange-traded funds have witnessed nine straight months of net redemptions, shrinking their share of the loan market down to approximately 10 percent from 17 percent in June of last year. Robust demand from a high volume of CLO originations, on the other hand, overwhelmed the supply of loans in the second quarter. Visible demand in the second quarter was almost $11 billion greater than the change in loans outstanding, according to S&P LCD, solely due to weak loan issuance against heavy CLO originations in April. This helped lift secondary loan prices and tighten spreads on new issue B-rated loans, which represented the majority of loan issuance this year.
Bank Loan Technical Dynamics Help Drive Valuations
Mutual fund outflows have continued for nine consecutive months, but robust CLO volume in the second quarter more than offset visible net outflows and helped tighten discount margins. Although not the sole driver, the balance between net visible flows and loan issuance can drive spreads wider or tighter.
Source: Guggenheim Investments, S&P LCD, Credit Suisse. Data as of 6.30.2019.
The Credit Suisse Leveraged Loan index gained 1.6 percent in the second quarter, boosting the year-to-date return to 5.4 percent. This represents the index’s best first-half performance since 2009. Performance across all rating categories was positive in the second quarter, with BBs gaining 1.7 percent, Bs gaining 1.6 percent, and CCCs gaining 0.6 percent.
Over the next few months, investors should expect to see a reduction in loan coupons as the Fed delivers rate cuts. The index performance attributed to interest returns since January already reflects some decline in the one-month and three-month London inter-bank offered rate (Libor) since the market began to price in Fed easing. We do not expect this to have an impact on CLO demand for loans given that they will also see liability costs decline. We may see some pickup in loan supply in the third quarter, but August tends to be a quiet month for primary markets so any pickup in issuance would likely come in September.
Late Summer Loan Issuance Tends to be Muted
We may see some pickup in loan supply in the third quarter, but August tends to be a quiet month for primary markets so any pickup in issuance would likely come in September.
Source: Guggenheim Investments, S&P LCD. Data as of 6.30.2019. Based on institutional loan issuance only.
—Thomas Hauser, Senior Managing Director; Christopher Keywork, Managing Director
Important Notices and Disclosures
This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. It contains opinions of the authors but not necessarily those of Guggenheim Partners or its subsidiaries. The authors’ opinions are subject to change without notice. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is no guarantee of future results.
Investing involves risk. In general, the value of fixed-income securities fall when interest rates rise. High-yield securities present more liquidity and credit risk than investment grade bonds and may be subject to greater volatility. Asset-backed securities, including mortgage-backed securities, may have structures that make their reaction to interest rates and other factors difficult to predict, making their prices volatile and they are subject to liquidity risk. Investments in floating rate senior secured syndicated bank loans and other floating rate securities involve special types of risks, including credit risk, interest rate risk, liquidity risk and prepayment risk. Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Funds Distributors, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited, and Guggenheim Partners India Management.
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Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Funds Distributors, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited and Guggenheim Partners India Management.