The Loan Syndications & Trading Association reported Friday that for the second time in three months, leveraged loans in October had negative returns on the S&P/LSTA Leveraged Loan Index of most actively traded loans.
In addition, that 0.43% loss in the index last month was also the worst monthly total for the year, according to the LSTA’s weekly newsletter.
“Market value losses within the index were steep in October, at 0.94%, which represented the fifth time in the past six months (and third month in a row) where market values were negative,” wrote Ted Basta, the LSTA’s executive vice president of market analytics and investor strategy. “All told, the average bid level fell 92 basis points to a 95.4 handle, the first sub-96 reading since early January.”
Over 75% of loans reported mark-to-market declines in prices in the secondary market – or 4.7 loans for every loan price that advanced, according to Basta. And the declines hit each of the 10 largest sectors of the loan market, with the telecom and leisure industries suffering the steepest declines of 0.9%.
But there is a silver lining to the loan performance: Loans are still doing better than high-yield bonds for the speculative-grade investor. Citing a report from Lehmann Livian Fridson Advisors, Basta wrote that “the difference between the three-year discounted spread on the LLI and the option-adjusted spread (OAS) on the ICE BofAML US High Yield Index reveals that bonds are extremely rich versus loans.”
Basta added the analysis from researcher Marty Fridson “hadn’t reached that conclusion since early 2017.”
According to Basta, “loan yields look attractive versus high-yield, a message that could resonate with cross over investors and lead to an influx of new liquidity in the secondary loan market.”
