Monthly US Loan Market Update - April 2020

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

A historically challenging month for the loan market ended more positively than it began, as investors took solace in the collective actions of the US Federal Reserve (the Fed) and Congress to backstop the suddenly vulnerable American economy. Since late February, financial markets have sought to price in the escalating health and economic costs of a global pandemic. The introduction of increasingly restrictive social distancing measures across the world aimed at containing the spread of COVID-19 put a sudden stop to vast swaths of social and commercial activity. Simultaneously, Saudi Arabia and Russia initiated an oil price war as an OPEC agreement to limit production broke down despite collapsing demand. With investors struggling to calculate the economic damage likely to result from this unprecedented situation, volatility soared in March to levels not seen since the throes of the global financial crisis (GFC) in 2008. In response, the Fed announced monetary stimulus programs going well beyond the extraordinary measures taken during 2008, and Congress passed $2 trillion of fiscal support for individual Americans, small and large businesses, states, and municipalities. The size and speed of the policy response, mirrored by other nations as well, dwarfs that of 2008 and spurred a remarkable relief rally in risk markets towards the end of the month. 

Facing a suddenly challenged credit outlook as well as redemption pressure from retail and institutional accounts, the loan market plunged in unison with equities and other corporate debt markets during March. The sectors most directly impacted by COVID-19 (Oil & Gas, Airlines, Retail, Gaming & Leisure) and, specifically, the issuers with the thinnest financial flexibility to weather a sharp downturn, fared the worst. However, the volatility was as extreme on the way up as it was on the way down. Behind the staggering headline price declines in March were also some of the largest-ever one-day gains in the loan market, and in risk assets more broadly, as fiscal and monetary support measures curbed the perceived tail risks. Overall, the loan market returned -12.37% during the month, bringing the year-to-date return to -13.05%.1 

Amid the turbulence, loans underperformed high yield bonds (-11.76%) and investment grade (-7.47%).2 The percentage of loans trading below $80 soared from 5% to 57% before ending the month at 24%.3 Prices declined across the board, but with significant dispersion by sector; the Oil & Gas sector was the worst performing at -31.95% and the Cable and Satellite TV sector was the best performing at -4.71%.1 Through the first half of March, price declines were roughly equivalent across the quality spectrum as liquid, high quality credits were heavily sold to raise cash for redemptions. However, high- and mid-quality credits recovered towards month-end once the technical pressure driven by liquidity needs abated and buyers became more active. Low quality remained under pressure even as the market rallied due to a focus on credit concerns. Ultimately, “BBs” (-9.86%%) outperformed “Bs” (-13.18%) and “CCCs” (-22.20%).4 The average price in the loan market was $83.18 at the end of April.4 At the current average price, senior secured loans are providing a 9.30% yield inclusive of the forward LIBOR curve.5

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^1 S&P/LSTA Leveraged Loan Index as of March. 31, 2020.

^2 S&P/LSTA Leveraged Loan Index and Bloomberg as of March. 31, 2020. High yield represented by BAML US High Yield Index;
investment grade represented by the BAML Investment Grade Index.

^3 JP Morgan as of March. 31, 2020.

^4 Credit Suisse as of March. 31, 2020.

^5 Credit Suisse and Invesco as of March. 31, 2020.