Risk markets staged a strong rebound in April, partially retracing the historic losses suffered in February and March. Ongoing announcements of expanded fiscal and monetary interventions in the face of COVID-19 signaled a strong commitment by policymakers to ease funding concerns for corporates and consumers alike, curbing the perceived tail risk to markets. Investors were also encouraged by the flattening of infection curves in several virus hotspots in the US and Europe, as well as hopeful developments in the search for effective drug treatments, both critical steps towards the reopening of economies. Thus, despite a steady stream of bleak economic data, deteriorating earnings outlooks, and ratings agency downgrades, the loan market posted a 4.50% return in April (the best monthly return since July 2009), bringing year-to-date returns to -9.13%.1
Amidst the rally, loans outperformed high yield bonds (3.80%) but underperformed investment grade (5.37%).2 The percentage of loans trading below $80 declined from 24% to 17% as high and mid quality issuers benefitted from investors’ returning focus to credit fundamentals.3 Quality divergence remained a key theme for loans in April. While “BBs” (4.12%) and “Bs” (4.99%) only modestly outperformed “CCCs” (4.0%), note that “CCCs” have hardly retraced their steep year-to-date losses (now -19.76%), unlike higher quality loans.1 The quality divergence appeared within “Bs” as well; the average bids on B+, B, and B- rated issuers at the end of April were $90.86, $88.17, and $83.13, respectively.1 The gap between B and B- is the largest since December 2016.1 With both quality and liquidity at a premium, loan size has also factored into performance, with the largest 100 loans returning -5.30% cumulatively during March and April versus -8.43% for the total market.1,4 The average price in the loan market was $87.22 at the end of April.1 At the current average price, senior secured loans are providing a 8.76% yield inclusive of the forward LIBOR curve.5
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^1 Source S&P/LSTA Leveraged Loan Index as of April 30, 2020.
^2 S&P/LSTA Leveraged Loan Index and Bloomberg as of April 30, 2020. High yield represented by BAML US High Yield Index; investment grade represented by the BAML Investment Grade Index.
^3 JP Morgan as of April 30, 2020.
^4 S&P/LSTA Leveraged Loan 100 Index as of April 30, 2020. Represents the 100 largest and most liquid loans in the market.
^5 Credit Suisse and Invesco as of April 30, 2020.