November 19, 2018
Between 2000 and 2016, the primary loan market would typically price about 25 new money transactions annually of $2.5 billion or larger. Those numbers rose to 54 transactions in 2017 and 43 transactions so far in 2018. We view this trend with a skeptical eye. Such large transactions are a result of large leveraged buyouts (LBO), which have priced at the highest multiples on record. Those multiples, excluding fees and expenses, averaged more than 10x in 2017 and 2018, compared to 8–9x in 2006 and 2007.
Source: S&P LCD, Guggenheim Investments. Data as of 9.30.2018.
Large leveraged buyouts have priced at the highest multiples on record. Those multiples, excluding fees and expenses, averaged more than 10x in 2017 and 2018, compared to 8–9x in 2006 and 2007.
Notwithstanding some large notable transactions, there has been a general lack of supply and increased loan demand this summer. Institutional loan volume totaled only $89 billion in the third quarter, the lowest since the first quarter of 2016. Year-to-date institutional issuance of $362 billion is down 8 percent year over year. Meanwhile, CLO issuance is on pace to set an annual record. This speaks to why the market has absorbed large transactions with such ease: The technical imbalance kept secondary spreads from widening over the summer and in early fall. The Credit Suisse Leveraged Loan index gained 1.9 percent in the third quarter, making it the 11th consecutive quarter of positive returns. During the quarter, three-year discount margins tightened to 381 basis points and set a new post-crisis low of 379 basis points, though spreads remain wide of the historical low of 230 basis points.
During the third quarter, three-year discount margins tightened to 381 basis points and set a new post-crisis low of 379 basis points. Following some spread widening at the end of October, spreads remain near the post-crisis low, but wide of the historical low of 230 basis points.
Source: Credit Suisse, Guggenheim Investments. Data as of 9.30.2018.
The negative impact of general risk-off sentiment came late in the loan market. U.S. equity market volatility spilled into high-yield corporate bonds in October before it spilled into loans. By the end of October, bank loan secondary discount margins had widened by only 15–20 basis points, compared to a more pronounced effect in similarly rated corporate bonds. Absent a major credit shock, we think CLO demand for loans will continue as investors pencil in another Fed rate hike in December. In light of still-tight spreads and high leverage and price multiples, we remain highly selective in how we identify value in the loan market.
—Thomas Hauser, Senior Managing Director; Christopher Keywork, Managing Director
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. ©2018, 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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