A strong finish to March allowed the U.S. leveraged loan market to have its best quarter in nearly four years.
The Markit iBoxx Leveraged Loan Index returned 1.52% in the first quarter, and Markit’s liquid loan index, which tracks 100 most actively traded loans, fared even better, returning 2.35%.
Most of the surge came after February, most notably in the liquid index which in mid-February was showing a loss of over 2% on returns.
“After a volatile start to 2016, investor demand for leveraged loans returned as risky assets came back into favor,” said Neil Mehta, a credit market analyst at Markit, in a statement. The liquid loan index performance in the quarter was “the best quarterly return since Q3 2012,” he added.
Investors added $444 million to exchange traded loan funds in March, increasing assets under management by 7.8%, and nearly offsetting the $466 million of withdrawals during the two previous months.
Prior to March, the Markit liquid leveraged loan index had experienced four consecutive months of negative returns. In February, leveraged loans were down nearly 2% on a total return basis.
But a “change in sentiment” by investors saw the liquid index rally in “spectacular fashion,” according to Markit.
The greatest area of improvement in terms of pricing were double-B rated loans with a 12.72% improvement in average loan spread tightening to 390 bps over Libor. Seven-year ‘CCC’-rated loans also saw an 11.82% improvement, although their spreads remained widened at Libor plus 1000 bps.
The best performing sector was healthcare, where loans in the ‘BB+’ category tightened 21 bps. A bounce-back in crude oil prices helped tighten ‘BB+’ and ‘BB-’ rated energy sector loans by 15 bps and 13 bps, respectively.
The stabilization in loan trading prices was felt in the U.S. and European collateralized loan obligation portfolio trading market. Markit reported CLO spreads widened “significantly from January until early March, according to Markit, but tightened by the end of the quarter.
According to Thomson Reuters, CLOs’ weighted average purchase price through March 28 was at 95.42, and the average sale price climbed to 93.69.
Healthcare was the most widely traded sector in CLOs in the first quarter, followed by electronics and retail. Two-thirds of the sales involved loans with spreads of less than 400 bps, and over half of the trading volume was with loans that had a facility size exceeding $1 billion.
The most active loans traded in the first quarter in CLO portfolios included Staples, Petco and MedAssets.