Loan Review – November 2017

Monthly Commentary

December 14, 2017

As we approach year end, the magnitude of the re-pricing wave and the enormity of CLO issuance has been truly astounding. While November showed signs of price weakness, neither CLO issuance nor the frenetic pace of re-pricings ever wavered.

CLO issuance for the first 11 months of the year has surpassed $105 billion. Original projections for 2017 issuance were approximately $40 billion lower. Revised projections called for closer to $100 billion of issuance. Now, with one month remaining in the year, 2017 has surpassed all but 2014 in total annual CLO issuance.

This demand has created pressure on LIBOR loan spreads. While 3-Month LIBOR has increased 49 basis points year-to-date, the overall yield for the Credit Suisse Leveraged Loan Index (CS LLI) is nearly unchanged. This suggests LIBOR spreads have tightened nearly 50 basis points.

Borrowers are reducing spreads both by amending existing deals and by syndicating new issue loans. There has been nearly $900 billion of gross volume. Of that, nearly $665 billion is related to repricing and refinancing existing deals. November produced the highest level of repriced and refinanced deals since the first quarter.

Repriced/Refinanced Deals YTD

Source: JPMorgan High Yield and Leverage Loan Morning Intelligence

LIBOR spreads are now at their tightest levels since 2011 and almost 25% of the index trades with a spread of 2.5% or lower.

Interestingly, the index has still grown 9.2% year-to-date and despite this growth, the market has still witnessed dramatic spread tightening.


In November 2017, the Credit Suisse Leveraged Loan Index and the S&P Leveraged Loan Index (“S&P/LSTA”) were both up 0.12%.

  • Year-to-date ending November 30, 2017, the CS LLI was up 3.85% and the S&P/LSTA was up 3.71%.
  • For the 12 months ending November 30, 2017, the CS LLI was up 5.03% and the S&P/LSTA was up 4.91%.

Split single B and split double B loans provided the best returns for November. On a year-to-date basis, lower quality loans outperformed higher quality as split single B, triple C and single B led all categories.

Source: Credit Suisse Leveraged Loan Index

Sector Performance

Fifteen of 20 CS LLI sectors provided a positive return during the month. The top performing sectors in November were Metals (+1.11%), Food & Drug (+0.59%) and Utility (+0.45%).

The worst performing sectors for the month were Consumer Non-Durable (-1.17%), Consumer Durable (-0.91%) and Transportation (-0.20%).

On a year-to-date basis, Metals, Service and Manufacturing led all sectors with total returns of 5.86%, 5.14% and 4.95%, respectively.

On a year-to-date basis, Consumer Durables, Food & Drug and Retail were the worst performing sectors with returns of 1.12%, 1.21% and -3.05%, respectively. All three sectors are being impacted to some degree by e-commerce.

Total Return by Sector

Source: Credit Suisse Leveraged Loan Index

Interestingly, when looking at the CS Liquid Leveraged Loans, Energy (-1.1%) was the worst performer in November while Retail was the top performing sector (+1.7%). Weakness from WTI led to a drop in Energy loan prices while Retail loans benefited from distressed investors beginning to step in and provide support.

Retail and Consumer were the only two sectors to post negative YTD returns.

Returns by Sector for CS Leveraged Liquid Loans

Source: Credit Suisse

Flow-name prices moved lower in the first two weeks of November, before rebounding and ending the month at 99.58.

In the last 12 months, the CS LLI is up over a point despite weakness in November. This elevated level of pricing has allowed for a re-repricing wave. 66.6% of the leveraged loan index was trading above par, at month-end. Despite prices declining during the course of the month, the fact that nearly 70% of loans trade at or above par has allowed for the asset class to permit a massive re-pricing wave ($64bn Nov-17 vs $67bn Feb-13).

Average Loan Flow-Name Bid

Source: LCD, an offering of S&P Global Market Intelligence

Average Price of the CS LLI (LTM)

Source: CS LLI

Technical Conditions

CLO new issue supply was $12.3 billion in November, down -4% from October. Year-to-date, over $106.8 billion of CLOs have been issued, far exceeding estimates for 2017. With the constant drumbeat of CLO issuance, loan prices continue to grind higher and spreads continue to tighten.

CLO Volume

Source: LCD, an offering of S&P Global Market Intelligence

November’s retail outflows were roughly -$2.7 billion, which equates to roughly 2% of the total outstanding retail base. While the outflows weighed slightly on index prices, the repricing wave never wavered. CLO demand just overwhelmed mutual fund outflows.

Institutional new issue volumes increased month-over-month by 24%. The loan market issued approximately $51 billion of loans in November (the 6th largest month of the year) and almost 40% of that was simply repricing or refinancing existing deals. Therefore, the real supply to the market was closer to $30 billion, further contributing to the technical imbalance.

Leveraged Loan Volume

Source: LCD, an offering of S&P Global Market Intelligence

In terms of the new issuance, roughly 37% of the primary market was related to refinancing existing deals while acquisitions and LBOs accounted for 34% of new issuance.

November Institutional Volume

Source: LCD, an offering of S&P Global Market Intelligence

The repayment rate increased to 6.02% from 5.65% in October. November posted the second lowest level of repayments in the last 12 months. The lower level of repayment rates has eased some pressure from supply not meeting demand.

Lagging Three-Month Repayment Rate

Source: LCD, an offering of S&P Global Market Intelligence

Given the fact that most loans trade near par and the fact that the average LIBOR spreads have declined as a result of repricings, the trailing 12-month returns have also declined. This can be seen below as November had $12.3 billion of inflows from CLOs and -$3.7 billion of outflows from retail funds for net flows of $8.6 billion. Amid the strong inflows, LTM returns continued lower.

Inflows and Rolling LTM Returns

Source: LCD, an offering of S&P Global Market Intelligence

New issue spreads in November were relatively unchanged for double Bs and approximately 8% tighter for single B issuance from the prior month. The Index spread for the CS LLI ended November at roughly L+360 bps. This is the tightest spreads have been for the CS LLI index since April 2011.

New Issue Spread Changes

Source: LCD, an offering of S&P Global Market Intelligence

Average new issue yields contracted month-over-month for Single Bs (-0.27%) and Double Bs (-0.05%).

Average New-Issue Yields

Source: LCD, an offering of S&P Global Market Intelligence

There have been 24 defaults in the last 12 months including four in November. The LTM default rate moved higher based on a number of defaults (1.72%) and par amount outstanding (1.95%). While the default rate remains low, it moved substantially higher during the month.

Lagging 12-Month Default Rates

Source: LCD Loan Stats
* Shadow default rate includes potential defaults, including those companies that have engaged bankruptcy advisors, performing loans with SD or D corporate rating and those paying default interest

Retail and Restaurants accounted for seven of the 24 defaults while commodity-driven loans accounted for four. Healthcare contributed the third most defaults in the LTM period with three.


Since 1992, the average 3-year discount margin (“DM”) for the CS LLI, is 462 basis points. If the global financial crisis (2008 & 2009) is excluded, the 3-year discount margin for the CS LLI is 417 basis points. At month end, the 3-year DM (421 basis points) was wide to the historical average and 4 basis points wider than the prior month.

The DM spread differential between double Bs and single Bs widened 15 basis points from December 2016 to November 2017 and is still 37 basis points wide of the historical spread differential.

3-Year Discount Margin Differential Between BBs and Single Bs

Source: Credit Suisse Leveraged Loan Index

CS LLI Snapshot


As of November 30, the S&P/LSTA Index’ imputed default rate was 1.7%, one of the lowest levels since December 2007.

The technical dynamics of the loan market remained the same. CLO supply continued at an elevated pace while the primary market was dominated by repricing, refinancing and opportunistic transactions. Retail fund outflows have not been nearly substantial enough to offset demand.

Looking forward, with institutional cash balances at relatively high levels and a number of ramping CLOs looking to price before year-end, demand will likely remain intact for December. For the demand picture to change, it will require some combination of an increase in liability spreads for CLOs and/or large outflows from loan and high yield accounts. This combined with an increase in new loan supply could cause weakness. However, this is unlikely to occur in the near future and we would expect to continue to see loans move higher and spreads tighten through December.


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