The Credit Suisse Western European Leveraged Loan Index (“CS WELLI” or “Index”) returned 6.66% in April, comprised of principal return of 6.27% and interest return of 0.39%.1
After the sharp sell-off in March, April saw an impressive rally of markets. For example, US and European equity markets rose by around 10%.2 The leveraged loan market joined the rally, with the average price of the Index increasing by €5.29 during the month, and thus recouping nearly 40% of March losses.1 There are two important drivers behind this: (1) central banks started to buy assets in an unprecedented manner and offered additional emergency liquidity, and (2) social distancing measures have proven to be successful in slowing the spread of the coronavirus. Many nations, therefore, have started to ease lockdown measures and are now forming plans for a gradual reopening of their economies.
During April, we witnessed the severe impact of lockdown measures on economic activity across the globe. The US recorded over thirty million new jobless claims over the past 6 weeks – its highest level on record. First quarter Euro area GDP growth was -3.8%, with the ECB’s president Lagarde warning that GDP could fall between 5% and 12% in 2020 with a 15% contraction in Q2 according to ECB staff estimates. The largest downside risks to any recovery is that of weak consumer demand once businesses reopen and further coronavirus outbreaks that could force new lockdown measures until there is a vaccine.
During April, businesses approached governments, lenders, and shareholders for additional liquidity in order to weather the lockdown period. For example, Hotelbeds, a provider of services to the travel industry, received a significant liquidity injection from its private equity owners to bridge temporary funding needs. Furthermore, the European leveraged finance market saw first signs of a reopening with two well-received high yield issuances, both aimed at providing additional liquidity to borrowers. There was no primary loan market issuance during the month notwithstanding the market conditions. The severe rating agency downgrades of loans (and subsequent expansion of the proportion of ‘CCC’ rated loans) caused the CLO market – a significant driver of demand of loan issuance – to focus on secondary market opportunities. Nevertheless, three CLO deals closed during the month, all with structural changes reflecting the current market conditions (smaller size, shortened non-call periods, and removal of junior tranches, for example). CLO AAA tranches have shaken out at a discount margin between 195-225 bps, around 100bps wider than pre-COVID crisis levels.
We expect the primary loan market to gradually reopen, most likely during the second half of the year. Anecdotal reports suggest that arranger banks have underwritten several deals and are assessing the market conditions as to when would be best to bring these deals to market. Looking ahead, we believe there will be more CLO activity with pre-crisis warehouses expected to launch, which should provide additional support for the loan market.
The CS WELLI’s nominal value (size of the market) at the end of the month was approximately €318 billion, a 2.1% increase YTD.1
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^1 Source Credit Suisse Western European Leveraged Loan Index (CS WELLI) in EUR as of April 30, 2020.
^2 Source S&P 500 Index (in USD) and STOXX Europe 600 Index in EUR as of April 30, 2020. The S&P 500 is widely regarded as the best single gauge of large-cap U.S. equities. The index includes 500 leading companies and covers approximately 80% of available market capitalization. The STOXX Europe 600 Index is derived from the STOXX Europe Total Market Index (TMI) and is a subset of the STOXX Global 1800 Index. With a fixed number of 600 components, the STOXX Europe 600 Index represents large, mid and small capitalization companies across 17 countries of the European region: Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Norway, Poland, Portugal, Spain, Sweden, Switzerland and the United Kingdom.