Bank Loans: Refinancing Surge Continues

Spreads continued to tighten as refinancing surges, but they remain well above pre-crisis averages.

May 18, 2017


This Bank Loans sector report is excerpted from the Second Quarter 2017 Fixed-Income Outlook.

The driving theme in the loan market continued to be the surge in refinancing activity, a trend we expect will continue at least through the third quarter. Borrowers who completed a refinancing transaction in the first quarter reduced contractual spreads by almost 90 basis points. New issue volume has also been robust outside of refinancing activity, with institutional loan issuance totaling $96 billion in the first quarter of 2017, up from only $33 billion in the first quarter of 2016. This increase was accompanied by significant demand from CLOs and mutual funds. On a net basis, new supply has fallen short of visible inflows for 12 consecutive months.

Institutional Loan Issuance Rebounds Despite Refi Activity

New issue volume has been robust outside of refinancing activity, with institutional loan issuance totaling $96 billion in the first quarter of 2017, up from only $33 billion in the first quarter of 2016. On a net basis, new supply has fallen short of visible inflows for 12 consecutive months.

Institutional Loan Issuance Rebounds Despite Refi Activity

Source: S&P LCD, Guggenheim Investments. Data as of 3.31.2017.

The Credit Suisse Leveraged Loan Index gained 1.2 percent in the first quarter of 2017 as three-year discount margins tightened by 17 basis points quarter over quarter. This makes it the fifth consecutive quarter of positive returns in the loan market. Lower-quality loans outperformed higher-quality loans again in the first quarter, with CCC-rated loans returning 5.0 percent versus 0.6 percent for BB-rated loans and 1.1 percent for B-rated loans.

Yields have fallen significantly due to the level of refinancing transactions taking place. As of mid-April, contractual loan spreads averaged approximately 360 basis points in the secondary market, levels not seen since 2010 when the majority of outstanding loans were issued between 2005 and 2007 at the height of the previous cycle’s bull market. As we deploy capital at current levels, we are increasingly aware that many of these loans may have to survive another downturn. Therefore, despite seeing strong tailwinds that we expect will drive positive returns over the next two years, we maintain a more conservative outlook and continue to focus on more defensive credits with consistent cash flow and sustainable debt burdens. With this in mind, we continue to see opportunities in technology and selectively in energy, the latter supported by our Macroeconomic and Investment Research Group’s view that oil prices will gradually rise over the next two years.

Institutional Loan Yields and Contractual Spreads Decline to Six-Year Lows

Yields have fallen significantly due to the level of refinancing transactions taking place. As of mid-April, contractual loan spreads averaged approximately 360 basis points, levels not seen since 2010 when the majority of outstanding loans were issued in 2005 and 2007 at the height of the previous cycle’s bull market.

Institutional Loan Yields and Contractual Spreads Decline to Six-Year Lows

Source: S&P LCD, Bloomberg, Guggenheim Investments. Data as of 4.21.2017.

—Thomas Hauser, Senior Managing Director; Christopher Keywork, Managing Director

Important Notices and Disclosures

This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. It contains opinions of the authors but not necessarily those of Guggenheim Partners or its subsidiaries. The authors’ opinions are subject to change without notice. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is no guarantee of future results.

Investing involves risk. In general, the value of fixed-income securities fall when interest rates rise. High-yield securities present more liquidity and credit risk than investment grade bonds and may be subject to greater volatility. Asset-backed securities, including mortgage-backed securities, may have structures that make their reaction to interest rates and other factors difficult to predict, making their prices volatile and they are subject to liquidity risk. Investments in floating rate senior secured syndicated bank loans and other floating rate securities involve special types of risks, including credit risk, interest rate risk, liquidity risk and prepayment risk. Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Real Estate, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited and Guggenheim Partners India Management. ©2017, Guggenheim Partners, LLC. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC.


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