The U.S. Secondary Loan Market Ted Basta, LSTA Americo Cascella, Ares Andrew Gordon, Octagon Chris Remington, Eaton Vance Gunther Stein, Symphony

Transcription

1 The U.S. Secondary Loan Market Ted Basta, LSTA Americo Cascella, Ares Andrew Gordon, Octagon Chris Remington, Eaton Vance Gunther Stein, Symphony Hong Kong June 8, 2017

2 A Historical Overview

3 In 1997, S&P and the LSTA Created the S&P/LSTA Leveraged Loan Index The Benchmark $1,000 Total Outstanding ($ billions) $750 $500 $250 $- Jan-97 Oct-00 Aug-02 Jun-04 Apr-06 Feb-08 Dec-09 Oct-11 Aug-13 Jun-15 Apr-17 Source: S&P/LSTA Leverage Loan Index 3

4 In 1999, The LSTA and Thomson Reuters LPC Launched the First Daily Mark-to-Market Pricing Service 2,500 2,000 Company Coverage Number of Loans Priced 2,300 7,000 6,000 5,000 Number of Individual Quotes Collected From 30 Broker/Dealers 6,545 1,500 1,495 4,000 1,000 3,000 2, , Source: LSTA/Thomson Reuters LPC Mark-To-Market Pricing 4

5 In 2001 The Wall Street Journal Began Coverage on the U.S. Syndicated Leveraged Loan Market Transparency and acceptance of MTM prices were critical in establishing today s secondary market liquidity levels. Source: Wall Street Journal 5

6 In 2006, The LSTA Board Mandated the Reporting of Over-the-Counter Secondary Loan Transactions to the LSTA $700 Secondary Trade Volume 100 AVG Trade Price $600 $ Billions $400 $ $200 $ $ LTM 50 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Source: LSTA Trade Data Study 6

7 The Secondary Market Allows Loan Managers to Build Customized Portfolios by Risk and Return Profile 25% Breakdown by Facility Rating (at MV) L+1000 Discounted Spread (3-Yr) 20% L % L % L+400 5% L+200 0% L+ Source: S&P LCD & S&P/LSTA Leveraged Loan Index 7

8 Loan Managers Can Make Allocation & Selection Decisions Across 40 Sectors Totaling $900 Billion Electronics/Electrical Business Equip. & Services Health Care Retailers (except food & drug) Lodging & Casinos All Telecom Leisure Chemicals & Plastics Cable & Satellite Television Oil & Gas Drugs Building & Development Radio & Television Food Service Insurance Industrial Equipment Food Products Aerospace & Defense Containers & Glass Products Publishing Financial Intermediaries Automotive Food/Drug Retailers Equipment Leasing Surface Transport Other <1% each) 0% 2% 4% 6% 8% 10% 12% Source: S&P LCD & S&P/LSTA Leveraged Loan Index 8

9 Secondary Trading & Liquidity

10 Almost 450 Individual Loans Are Trading on a Daily Basis, Totaling $3 Billion Per Day Daily Trade Volume (billions) Daily Average $5 $4 $3 $2 $1 $- Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb Count of Loans Traded Daily Daily Average Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Source: The LSTA Trade Data Study 10

11 Secondary Trading Volumes Have Surpassed All Time Highs Over the Last Year ($630B) on a Record $179B 1Q17 $200 $175 $150 Crisis Period Quarterly Secondary Trade Volume Market Expansion New Record $125 $100 $75 $50 $25 $- 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 Billions Source: The LSTA Trade Data Study 11

12 Trading Liquidity Remains Strong During Periods of Market Distress Billions Distressed Trading Volume ($) % of Total Volume 12-Mo Trailing Default Rate $150 30% $125 25% $100 20% $75 15% $50 10% $25 5% $ LTM 0% Source: LSTA Trade Data Study ; S&P / LSTA Leveraged Loan Index 12

13 1,200 Individual CLOs & Loan Funds Hold a Combined 64% of Institutional Loans Outstanding Number of CLOs 1,400 Number of Loan Funds 60% % of Institutional Loan Ownership 1,200 50% 1,000 40% ,110 30% % % % CLOs Loan Funds Other Source: S&P LCD & S&P/LSTA Leveraged Loan Index 13

14 Monthly Secondary Market Depth (loans traded) & Breadth (trade frequency) Are Trending to All-Time Highs 1,500 Loans Traded Trade Frequency (% of Loans Traded >20x per Mo.) 50% 1,400 40% 1,300 30% 1,200 20% 1,100 10% 1,000 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 0% Source: The LSTA Trade Data Study 14

15 Loan Returns & Performance

16 The Loan Asset Class Has Performed Well Given the Historically Low 10-Year Rate Environment 20% Historical Annualized Total Returns (through April 2017) S&P 500 High Yield Bond S&P/LSTA Loan Index High Grade Bond 10yr US Treas. 15% 10% 5% 0% 1 year 3 year 5 year 10 year -5% Source: S&P LCD & S&P/LSTA Leveraged Loan Index 16

17 Loans Have a History of Strong Performance During Periods of Rising Rates 15% 12% Cumulative Returns 2/94-2/95 Loans: 10.4% Aggregate: 0.01% High Yield: 1.4% 6/99-5/00 Loans: 3.9% Aggregate: 2.1% High Yield: -3.1% 6/04-6/06 Loans: 12.6% Aggregate: 6.5% High Yield: 17.5% Yields 9% 6% Cumulative Returns 3% 0% Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 3-Month LIBOR Loan Index Yield Average Loan LIBOR Floor Source: Credit Suisse Leveraged Loan Index 17

18 Long Term Loan Investors Have Enjoyed an Average Yield of 7.4% Over the Past 20 Years (5.7%- Post Recession) 15% 10% 5% S&P/LSTA Leveraged Loan Index YTM 2008 = 20% 0% 10% Annual Return 6% 2% 2009 = + 52% 2008 = - 28% -2% Source: S&P LCD & S&P/LSTA Leveraged Loan Index 18

19 Post Crisis, Annual Loan Returns Have Averaged 5.4%, While Annual Interest Income has Averaged 4.8% 101 Avg. Trade Price 12% Total Return Interest Return % 8% 93 6% % 2% 85 0% Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17-2% Source: LSTA Trade Data Study & LSTA/TRLPC MTM & S&P/LSTA LLI 19

20 Current Market Trends & Portfolio Management

21 Fixed Income Returns Have Fluctuated From Negative to Positive Over the Last Two-Plus Years 20% Fixed-Income Returns Jan-Apr % Total Return 10% 5% 0% -5% 10YR Treas HG Bonds Lev. Loans HY Bond Source: S&P/LSTA Leveraged Loan Index & LCD 21

22 Return Volatility Has Trended Lower Over the Past 12 Months (Loans Continued to be Least Volatile) Avg. 12-month Lagging Standard Deviation of Returns 3.0% 2.5% S&P/LSTA Loan Index High Grade Bond High Yield Bond 10yr US Treasury 2.0% 1.5% 1.0% 0.5% 0.42% 0.0% Dec.14 Dec.15 Dec.16 Apr.17 Source: S&P LCD & S&P/LSTA Leveraged Loan Index 22

23 A Majority of Portfolio Managers Became More Constructive on Credit in % 3.0% Default Rate ($) Projection (4Q16) Projection (3Q16) Projection (1Q17) 80% 70% 3Q16 Survey 1Q17 Survey When Will Default Rate Exceed Historical AVG of 3.1%? 2.5% 60% 2.0% 50% 1.5% 40% 1.0% 30% 0.5% 20% 0.0% 10% Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 0% Source: LCD, an offering of S&P Global Market Intelligence 23

24 Riskier Sectors and Rating Categories Produced Outsized Losses (2015) and Gains (2016) Jan_Apr 17 ANN Jan-Apr 2017 Annualized 50% 30% 40% 25% 30% 20% 20% 15% Return 10% Return 10% 0% 5% -10% -20% 0% -5% All Loans _ BBB Index BB Index B Index CCC Index -30% -10% Source: S&P LCD & S&P/LSTA Leveraged Loan Index 24

25 The Majority of Loans are Back to Trading Above Par in the Secondary Market 100 Median Trade Price AVG Trade Price 70% % of Trading Activity Price Level >100 <90 60% 98 50% 96 40% 94 30% 20% 92 10% 90 0% Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Source: The LSTA Trade Data Study 25

26 As Secondary Prices Rebounded Across the Market, Yield Levels Declined Across Credit Categories Avg. Disct. Spread (3-YR) Feb-16 (market low) Apr.-17 (market high) L % 18% L % 14% L+600 Yield 12% 10% L+500 8% 6% L+400 4% L+300 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 2% 0% All Loans _ BBB BB B CCC Source: LCD, an offering of S&P Global Market Intelligence 26

27 While Investor Demand Has Been Robust Over the Past Year, Loans Outstandings Have Increased Just 3% 1Q17 Non-Bank Lender Share of New Issue $1,000 Institutional Loan Outstandings Fin. & Insur. Co. Loan Mutual Funds Hedge & HY Funds CLO $900 Total Outstanding ($ bil) 8% 9% $800 62% 22% $700 $600 $500 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Source: S&P LCD & S&P/LSTA Leveraged Loan Index 27

28 Over the Past Year, Loan Funds Reported Inflows of $31 Billion (HY Bond Funds $11 Billion in Outflows) HY Bond Fund Flows Loan Mutual Fund Flows Loan Mutual Fund AUM $70 $200 $60 $50 $150 Billions $40 $30 $20 $10 $- $100 $50 Billions $(10) $(20) $(30) $- Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Source: Thomson Reuters Loan Pricing Corporation 28

29 Over the Last Year, CLO Issuance Has Totaled $86 Billion $150 CLO Issuance $500 CLO Aggregate Principal Balance $125 $400 Billions $100 $75 $50 Billions $300 $200 $25 $27.6 $100 $ LTM Apr.17 Source: Thomson Reuters Loan Pricing Corporation Jan-Apr. 17 $- Jan-13 Jun-13 Nov-13 Apr-14 Sep-14 Feb-15 Jul-15 Dec-15 May-16 Oct-16 Mar-17 29

30 Loan Market Technicals Shifted to Excess Demand Beginning in 2Q16 $50 Change in Loan Outstandings Change in Visable Demand $16 Excess Visable Demand $40 $14 $12 $30 $10 Billions $20 $10 Billions $8 $6 $4 $- $2 $(10) 2Q16 3Q16 4Q16 YTD-Apr. $- Source: Thomson Reuters LPC & S&P/LSTA Leveraged Loan Index 30

31 A Look Forward & Audience Q and A

32 Loan Returns Have Been Positive for 14 Months Alongside Rising Interest Rates Interest Return 3-Month LIBOR 3.0% S&P/LSTA Lev. Loan Index Total Return 3.0% Implied 3-Month LIBOR Forward Rates 2.5% 2.5% 2.0% 2.0% 1.5% 1.5% 1.0% 1.0% 0.5% 0.5% 0.0% 0.0% Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Source: S&P/LSTA LLI & Bloomberg Rates 32