LPC: The secondary loan market benefits from the drop in volatility

NEW YORK (Reuters) – Lower volatility in the loan market has made it easier to buy and sell secondary paper, although higher-quality loan names are still in high demand and experiencing tight liquidity, analysts said. market sources.

The loan market is in a period of relative calm after a few stormy months. In less than three months, the SMi100 composite – the 100 most widely held loans – has lost almost 2 points in the secondary market, with the average supply falling from 97.21 on December 1 to 95.3 on February 23, according to data from Thomson Reuters LPC.

In a sharp turnaround, these loans rallied and the average supply fell back to 97.2 on March 22. Fast forward a month, and the average bid was raised almost a point to 98.15, where they have been trading ever since.

During this volatile period, traders complained of difficulties with a lack of liquidity, which meant that executing a trade changed the price significantly. The risky and risky market has led market participants to want to make the same transaction.

“When the market goes down, everyone wants to sell. When the market recovers, everyone wants to buy,” said one lender.

In March and April, the liquidity crunch was compounded by the dearth of new primary loans coming to market. The surge in demand for new secured loan obligation (CLO) funds and cross-buyers has overwhelmed the meager supply of loans, pushing up secondary prices and making it harder to buy loans.

“When there is risk, you can sell whatever you want, but no one is selling quality credit. There is more demand for these loans than sellers,” one loan investor said in April.

LOWER REVENUE RATIO

In the lending market, the annual turnover rate fell to 71% last year from 83% in 2014, according to trade group LSTA.

The turnover ratio is the trading volumes divided by the average amount outstanding of the S&P/LSTA Leveraged Loan Index and can be considered an indicator of market liquidity. The LSTA predicts the ratio could fall below 70% this year, which would mark a 10-year low.

However, the reduced volatility narrowed the bid-ask spread for the top 100 loans to 0.65 points as of May 10, from 0.9 in mid-February.

Buyer appetite seems to have waned. There were fewer CLO formations in May compared to a very active end of April, while flows into bank loan mutual funds were modest, leaving them neither strong net buyers nor sellers. Additionally, high-yield bonds saw a large outflow of cash, which could depress cross-buying.

“Buyers don’t seem to be rushing as quickly to put money to work unless their hand is forced with an earnings release or a refund,” said another loan investor.

There remains a race for the best quality loans. With the recovery in financial markets looking rather fragile, buyers are focusing on higher rated loans.

“Liquidity isn’t too much of a problem for us, but higher quality names will continue to be hard to come by,” the loan investor said.

Reporting by Lisa Lee; Editing by Chris Mangham and Michelle Sierra

Priscilla C. Carnegie