Loans continued to recover in May, gaining 3.80% during the month and improving year-to-date returns to -5.68%.1 Encouraged by the initial stages of reopening, positive tidings on vaccine development, and additional policy support measures, investors wagered that economic activity has likely bottomed and a gradual rebound is underway. After sinking $20.46 from late February to late March, loan prices have now retraced $13.33, or 65%, of that loss.2 Loans underperformed high yield bonds (4.63%) in May, but outperformed investment grade (1.22%).3 The percentage of loans trading below $80 declined from 17% to 12%, and now stands well below the peak of 57% reached on March 23, 2020.2 This follows a comparatively stronger rally at the lower end of the quality spectrum in May; “BBs” (2.65%) underperformed “Bs” (4.57%) and “CCCs” (5.21%), though “CCCs” remain a clear laggard since the onset of COVID-19 with year-to-date losses of -15.58%.1 At a more granular level, investors became increasingly discerning of risk within “Bs”; as shown below, the bid differential between B+/BB- compressed in May to more normalized levels while the differential between B-/B remained elevated.1 The average price in the loan market was $90.33 at the end of May.2 At the current average price, senior secured loans are providing a 7.56% yield inclusive of the forward LIBOR curve.2
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^1 S&P/LSTA Leveraged Loan Index as of May 31, 2020.
^2 JP Morgan as of May 31, 2020.
^3 S&P/LSTA Leveraged Loan Index and Bloomberg as of May 31, 2020. High yield represented by BAML US High YieldIndex; investment grade represented by the BAML Investment Grade Index.