TRADING THROUGH THE VOLATILITY

Transcription

1 Connect to WiFi WiFi: Hilton Meeting Room Password: LSTAOPS19 Open Your Web Browser TRADING THROUGH THE VOLATILITY # LSTAOPS19 Go to slido.com Ted Basta, Executive Vice President Market Analytics & Investor Strategy, LSTA Maegan Gallagher, Head of Trading & Capital Markets, Octagon Credit Investors Neha Khoda, Director, Credit Strategy, BAML David J Mechlin, Director, Credit Suisse Asset Management Steve Miller, Managing Director, Fitch Solutions LevFin Enter Event Code: #LSTAOPS LSTA OPERATIONS CONFERENCE April 9, 2019

2 TRADING THROUGH THE VOLATILITY Ted Basta, Executive Vice President Market Analytics & Investor Strategy, LSTA Maegan Gallagher, Head of Trading & Capital Markets, Octagon Credit Investors Neha Khoda, Director, Credit Strategy, BAML David J. Mechlin, Managing Director, Credit Suisse Asset Management Steve Miller, Managing Director, Fitch Solutions LevFin 2019 LSTA OPERATIONS CONFERENCE April 9, 2019

3 2018/19 MARKET OVERVIEW & OUTLOOK

4 AUDIENCE POLLING QUESTION What is the Most Significant Risk to Loan Market Performance? A. Fund Flow Risk (Technicals Shift as Interest Rates Decrease) B. Headline Risk (Fake Loan News Incites Investors & Regulators) C. Credit Risk (Surging Downgrades/Spike in the Default Rate) D. Documentation Risk (Weaker Protections/Lower Recoveries) 4

5 Total Return After Registering Their Worst Quarter in Several Years, The Markets Have Staged Impressive Rallies in % 10% 4Q18 1Q19 7.4% 13.7% 5% 4.0% 3.1% 5.0% 0% -5% -10% -15% Lev. Loans (LLI) Source: S&P Global, LCD 10YR Treas HG Bonds HY Bond S&P500 5

6 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Prices (and Returns) Fell to Multi-Year Lows in December 2018, But Rallied in January/February to Only Pull-Back in March AVG Trade Price Median Trade Price 3% 2% 1% 0% -1% -2% -3% S&P/LSTA LLI Monthly Return Source: LSTA Trade Data Study & S&P/LSTA Lev. Loan Index 6

7 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19 Lending Volumes Tapered Off at Year-end 2018 as Upward Price Flex Activity Ensued and New-Issue Spreads Spiked (Albeit Briefly) Institutional Lending New Money Refinancing $120B 30 Price Flex Activity Flex Up Flex Down L+500 New Issue Spread Level $100B $80B $60B $40B $20B (10) (20) (30) L+450 L+400 L+350 L+300 $0B (40) L+250 Source: Refinitiv 7

8 A Technical Sell-Off Ensued in the Secondary Market During Late 4Q 2018 as Visible Demand Levels Weakened $150 $125 $100 $75 $50 $15 $5 $(5) $(15) $(25) CLO Issuance ($B) Q19 ANN Loan Mutual Fund Flows ($B) ANN LLI Outstandings ($B) Loan Funds CLOs $1,400 $1,200 $1,000 $800 $600 $400 $200 $586 50% of LLI $147 12% of LLI $- Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Source: REFINITIV & S&P/LSTA Leveraged Loan Index (LLI) 8

9 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Investor Sentiment Turned Positive Again in 2019, But the Yield Curve Just Inverted For First Time Since 07 3,000 2,750 2,500 2,250 S&P 500 Index YR Treas. (%) 3-MO Treas. (%) 2.0 3,750 3,250 2,750 Shanghai Composite Index , Source: Bloomberg 9

10 4Q18/1Q19 LIQUIDITY TEST ~DID WE PASS?

11 Loan Mutual Fund Flows Totaled a Record $15B in December 2018, The Largest One-Month Outflow on Record $10 $5 $- $(5) $(10) $(15) Loan Fund Flows ($ Bils.) Loan Fund Flows as % of AUM (L-axis) Loan Fund Flows as % of Outstanding (R-axis) 8% 1.0% 6% 4% 0.5% 2% 0% 0.0% -2% -4% -0.5% -6% -8% -1.0% -10% -12% -1.5% Source: Refinitiv 11

12 L3M (Jan) 12/14 (Ann.) 12/15 (Ann.) 12/18 (Ann.) Loan Market Liquidity is Strong in Today s Secondary Market and Illustrates Improvement During Times of High Volatility $1250B $1000B Trading Volume Avg. Size of the S&P/LSTA LLI Annual Loan Turnover Ratio (%) 80% 76% 70% 100% 75% $750B $720 50% $500B 25% $250B 0% Source: LSTA Trade Data Study 12

13 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18 Dec-18 Feb-19 T+ Business Days During 4Q18, Settlement Times on Buy-side Sales Tracked to All-Time Lows 22 Mean (Buy-side Sales) Median (Buy-side Sales) Source: LSTA Settlement Data Study 13

14 Headline, Credit & Documentation Risk

15 The Secondary Loan Market Grew $191 Billion (20%) Over the Last Twelve Months - to a Record $1.2 Trillion $1,200 S&P/LSTA LLI Outstanding ($ Billions) 30% Dec-16 Dec-17 Dec-18 $1,100 25% $1,000 20% 15% $900 10% $800 5% $700 Jan-16 Jan-17 Jan-18 0% Source: S&P/LSTA Leveraged Loan Index 15

16 The Default Rate Fell Below 1.5% in March 2019 and is Projected to Hit Just 1.6% by Year-end 3.0% 2.5% 2.0% 1.5% Projected LTM Default Rate by issuer count 1.4% 1.6% 2.6% Downgrade/Upgrade Ratio (Rolling 12-Mo.) Rolling 3 Mo. 1.0% 0.5% % Jan-17 Jan-18 Jan-19 Jan Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Source: LCD, S&P Global Market Intelligence. 16

17 AUDIENCE POLLING QUESTION Will Today s Weaker Lender Protections in Documentation Lower the Historical Loan Recovery Rate (79%)? Recovery Rates During the Next Default Cycle Will be A. Marginally Worse, More Like Covenant-Lite Loans 71% B. Worse, More Like Secured Bonds 66% C. Much Worse, More Like 2 nd Lien Loans 53% D. Not Sure Yet, But Any Worsening Will be Offset by Lower Defaults 17

18 Document Trends Favored Lenders Briefly During the Recent Market Pullback 60% Loans with Asset Sales Sweep Stepdown 40% Loans with an MFN Sunset 40% 20% 31% 30% 20% 10% 20% 0% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 0% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q Loans with Uncapped Synergies & Cost Savings EBITDA Addbacks 80% 60% 33% 40% 20% 0% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Composite Documentation Score Flex: 3Mo. Rolling Avg 2.5 More Protective Execution Launch Less Protective Source: Covenant Review 18

19 PANEL POLLING QUESTION Will Today s Weaker Lender Protections in Documentation Lower the Historical Loan Recovery Rate (79%)? Recovery Rates During the Next Default Cycle Will be A. Marginally Worse, More Like Covenant-Lite Loans 71% B. Worse, More Like Secured Bonds 66% C. Much Worse, More Like 2 nd Lien Loans 53% D. Not Sure Yet, But Any Worsening Will be Offset by Lower Defaults 19

20 PANEL POLLING QUESTION Will Today s Weaker Lender Protections in Documentation Lower the Historical Loan Recovery Rate (79%)? # LSTAOPS19 Recovery Rates During the Next Default Cycle Will be A. Marginally Worse, More Like Covenant-Lite Loans 71% B. Worse, More Like Secured Bonds 66% C. Much Worse, More Like 2 nd Lien Loans 53% Please Take A Moment to Rate This Session Survey will appear automatically D. Not Sure Yet, But Any Worsening Will be Offset by Lower Defaults 20