Monthly European Loan Market Update - April 2020

Monthly US Loan Market Update - March 2020
Monthly insights and updates from the Invesco Fixed Income team.

The Credit Suisse Western European Leveraged Loan Index (“CS WELLI” or “Index”) returned -13.57% in March, comprised of principal return of -13.94% and interest return of 0.36%.1 The average price of the Index is €83.64.1

During the month, accelerating developments around the COVID-19 coronavirus has triggered the most volatile conditions in global markets since the 2008/2009 global financial crisis (GFC). European and US equity markets have fallen significantly, most by at least 20% from their peaks, ending the longest bull-market run in history.2 GDP in the US and Europe is expected to decrease sharply – by at least 10%. A global recession in 2020 is expected. 

Most countries are now in a state of “lockdown” (of various degrees) aimed at limiting further spread of the disease. The US, Italy, and Spain are currently the epicenter of the pandemic. A rapid rise in infections in the UK and emerging market economies is expected in a matter of days. 

The negative economic consequences of these lockdown measures have resulted in unprecedented monetary and fiscal policy responses. In the US, a $2.2 trillion stimulus package, equivalent of 10% of US GDP, was agreed upon and interest rates were cut to 0%. European governments announced stimulus measures of 2%-4% of GDP combined with extensive loan guarantees. Fiscal/budget restrictions (Germany, for example) were discarded; wage payment schemes, business tax suspension, etc., have been introduced. The ECB unveiled a €750 billion bond purchasing plan and stated that there are “no limits to its commitment [to the Euro]”. 

While these actions have helped stabilize markets from a mid-month period of intense selling pressure and a flight to safety (quality), the leveraged loan market has not been immune to the daily double-digit percentage swings seen in equity markets. The CS WELLI’s average price declined by 14% during the month,1 although off the intra-month lows by around three-points, as the myriad of government measures were announced. However, bid-offer spreads remained wide and trading liquidity was diminished as uncertainty remains.  As we closed the month, higher rated credits continued to be well-bid, while lower rated credits started to gain more traction, although were slower to catch the modest rally. On a sector level, the Food/Tobacco, Technology, Media & Telecommunications (TMT), and Healthcare sectors have performed better than the Leisure/Travel, Energy, and Consumer Discretionary sectors.

The focus of the leveraged loan investor base is on borrower liquidity needs. Borrowers have increasingly started to draw down their revolving credit facilities, reducing non-essential capex spend and requesting access to the numerous governmental support packages (tax deferrals, wage subsidies, etc.) to support their businesses. Default rates are expected to increase; however, these measures should act, to a degree, as a mitigant. Rating agencies have begun downgrading companies to reflect the current macroeconomic environment.  

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^1 Credit Suisse Western European Leveraged Loan Index (CS WELLI) in EUR as of Mar. 31, 2020.