Monthly US Loan Market Update - August 2020

Monthly US Loan Market Update - August 2020

The loan market remained in recovery mode in July, gaining 1.96% during the month and improving year-to-date returns to -2.74%.1 Even as the spread of COVID-19 infections dominated headlines, US-China economic tensions worsened, and Congress failed to secure an extension for certain expiring policy support mechanisms (including enhanced unemployment benefits), risk assets moved higher on an encouraging start to earnings season and the US Federal Reserve’s messaging of unflinching support. From a more technical standpoint, the combination of limited new loan issuance in July with stronger CLO formation contributed to a better tone in secondary trading. The month saw far less price volatility as well, with daily price moves exceeding 20 basis points on just two days versus thirteen days in June.2 Since March’s -12.37% plunge, the loan market has returned 11.85%.1

Loans underperformed high yield bonds (4.78%) and investment grade (3.15%) in July amid strong demand for fixed rate credit.3 The percentage of loans trading below $80 remained at 8% while the top end of the market moved higher; the percentage trading at or above $98 increased from 5.7% in June to 26.0% in July.4 From a credit quality perspective, there was less dispersion across the spectrum this month; “BBs” 

(1.73%) slightly underperformed “Bs” (2.11%) and “CCCs” (1.95%).1 Even within the “B” category, price variance has become less pronounced as the market recovers; the gap in average bid prices between “B” and “B-“ fell below $3 in July from over $5 in April (it was $2.2 at the end of February).1 The average price in the loan market was $93.07 at the end of July.4 At the current average price, senior secured loans are providing a 6.43% yield inclusive of the forward LIBOR curve.4

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1 S&P/LSTA Leveraged Loan Index as of July 31, 2020.
2 S&P LCD as of July 31, 2020. 
3 S&P/LSTA Leveraged Loan Index and Bloomberg as of July 31, 2020. High yield represented by BAML US High Yield Index;
investment grade represented by the BAML Investment Grade Index.
4 JP Morgan as of July 31, 2020.