Seeking Alpha: Opportunities vs. Risk in the US Loan Market Today

Size: px

Start display at page:

Download "Seeking Alpha: Opportunities vs. Risk in the US Loan Market Today"

Tamsin Patterson
6 years ago
Views:

1 Seeking Alpha: Opportunities vs. Risk in the US Loan Market Today Moderator: Bram Smith. LSTA Speakers: Americo Cascella, Ares Stephen Casey, Neuberger Kevin Petrovcik, Invesco Mark Senkpiel, Babson

2 THE SEARCH FOR YIELD

3 Risk On; Risk Off How Can you Tell? Q GDP Growth 1.0% -0.3% 0.5% Fed Funds 3.9% 1.9% 0.4% 10 year Treasury 5.0% 3.7% 1.9% JGB s 1.3% 1.5% -0.1% S&P Returns -11.9% -36.6% 1.7% Loan Returns 4.2% -29.1% 3.6% High Yield Returns 4.5% -26.4% 6.4% Loan Default Rate by Dollar Value 6.3% 3.8% 1.7% Source: Federal Reserve, S&P Capital IQ 3

4 SECTOR PERFORMANCE 4

5 Weighted Average Bid for Institutional Loan Market US and Europe: Markets Both Improving Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 US (S&P LSTA Loan Index) Europe (S&P European Loan Index) 5

6 US Loan Yields Reverting to Norm L+1000 L+900 L+800 L+700 L+600 L+500 L+400 L+300 L+200 L+100 L+0 1/31/2011 3/31/2011 5/31/2011 7/31/2011 9/30/ /30/2011 1/31/2012 3/31/2012 5/31/2012 7/31/2012 9/30/ /30/2012 1/31/2013 3/31/2013 5/31/2013 7/31/2013 9/30/ /30/2013 1/31/2014 3/31/2014 5/31/2014 7/31/2014 9/30/ /30/2014 1/31/2015 3/31/2015 5/31/2015 7/31/2015 9/30/ /30/2015 1/31/2016 3/31/2016 BB B Source: S&P Capital IQ 6

7 Par Amount of Outstanding Leveraged Loans By Industry Other Electronics/electric Health care Business equipment and services Utilities Retailers (other than food/drug) Hotels/motels/inns and casinos Oil and gas Chemical/Plastics Telcommunications Leisure Financial Intermediaries Broadcast radio and television Automotive Publishing Cable television Aerospace and Defense Building and Development Food products Containers and glass products 5.63% 5.30% 4.81% 4.39% 4.28% 4.19% 3.82% 3.17% 2.70% 2.33% 2.55% 3.61% 1.94% 2.52% 2.15% 2.04% 7.35% 8.76% 9.94% 18.54% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 20.0% Includes all loans including those not included in the LSTA/LPC mark-to-market service vast majority are institutional tranches Source: Standard and Poor s LCD and S&P/LSTA Leveraged Loan Index 7

8 Healthcare 102bps 100bps 98bps 96bps Average Bid L+700 L+600 L+500 Spread to Maturity 94bps L bps L bps 88bps 86bps 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 L+200 L+100 L+0 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3% Monthly Returns 12.00% Annual Returns 3% 2% 2% 1% 10.00% 8.00% 6.00% 1% 0% -1% 4.00% 2.00% -1% -2% Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Healthcare 0.00% -2.00% All Loans Source: S&P Capital IQ 8

9 Oil & Gas 110bps Average Bid L+3000 Spread to Maturity 100bps L bps L bps L bps L bps L bps L+0 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 15% Monthly Returns 15.00% 10.00% 5.00% Annual Returns 10% 0.00% 5% 0% -5.00% % % -5% -10% % % % -15% Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar % Oil & Gas All Loans % 9 Source: S&P Capital IQ

10 Retail 102bps Average Bid L+800 Spread to Maturity 100bps L bps L bps L bps L bps L bps 88bps 86bps L+200 L+100 L+0 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 5% 4% 3% 2% 1% 0% -1% -2% Monthly Returns 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% Annual Returns -3% -2.00% Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Retail All Loans Source: S&P Capital IQ 10

11 Historic Returns 11

12 Loans vs. Common Fixed Income Investments SHORT DURATION Floating Rate Loans Barclays High Yield Bonds Index LONG DURATION 4 Yield to Maturity 3 2 Barclays US Aggregated Index Barclays Municipal Bond Index Barclays Investment Grade Bonds Index Barclays Government Bonds 1 3-month US Treasury Bill Bellwether Duration in Years Source: Barclays 12

13 Favorable Risk/Return Profile (1) Pre-Credit Crisis (Jan Dec 2007) Crisis Period (Jan Mar 2009) Post-credit Crisis (Apr 2009 Mar 2016) Annual Return Standard Deviation Sharpe Ratio Annual Return Standard Deviation Sharpe Ratio Annual Return Standard Deviation Sharpe Ratio Leveraged Loans 6.40% 2.34% 1.04 (19.41%) 15.78% (1.32) 8.86% 5.28% 1.66 High Yield Bonds 8.50% 5.73% 0.79 (17.93%) 19.50% (0.99) 11.68% 7.75% 1.50 Investment Grade Bonds 6.90% 4.74% 0.62 (5.46%) 12.15% (0.57) 7.98% 4.70% Year Treasuries 6.84% 5.92% % 10.64% % 5.94% 0.75 Equities 10.31% 13.27% 0.48 (37.06%) 23.25% (1.66) 16.97% 13.49% 1.25 Over the last 22 years, bank loans have realized only two negative return years (2008 and 2015) (2) High yield bonds, investment grade bonds and Treasuries: three negative years (3) U.S. equities: 4 negative years (3) Despite the historic reduction in short-term interest rates, loans have resumed their favorable risk/return profile during the post-crisis period (1) Source: Zephyr as of 3/31/2016. Bank Loans = Credit Suisse Leveraged Loan Index, HY Bond = Credit Suisse HY Index, IG Bonds = Barclays U.S. Corporate Investment Grade, 7-10 Year Treasuries = Barclays U.S. Treasury 7-10 Year Index, Equities = S&P 500 Index. Past performance does not guarantee future results. Performance during time period shown is limited and may not reflect the performance in different economic and market cycles. There can be no assurance that similar performance will be experienced. Investment cannot be made into an index. Indices are unmanaged and assume no fees. Please refer to the Risk and Disclosures for a description of the indices used in this presentation. (2) CS Leveraged Loan Index. (3) S&P Capital IQ. Source: Highland 13

14 US Loan Returns: Market Rebounds in March Annual Monthly 20.00% 8.00% 15.00% 6.00% 4.00% 10.00% 2.00% 5.00% 0.00% Jan-16 Feb-16 Mar-16 Apr % % -5.00% -4.00% % -6.00% Source: S&P Capital IQ S&P/LSTA Leveraged Loan Index BB Index B Index CCC Index 14 S&P/LSTA Leveraged Loan Index BB Index B Index CCC Only Index

15 Risk Adjusted Returns: Loans vs. High Yield, vs. High Grade 15

16 Returns for Selected Debt Assets Over the Last 10 Years* 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% -1.00% S&P/LSTA Index ML High Yield ML Higrade 10YR Treasuries -2.00% 1 year 3 year 5 year 10 year * As of April 2016 Source: S&P Capital IQ 16

17 Loans Have Exhibited Higher Risk Adjusted Returns Volatility of monthly returns for loans has been more muted than other fixed rate asset classes over the previous 36 months. The average annual volatility for the JPM Leveraged Loan Index over the last 3 years has been 2.5% vs. 6.1% for the JPM HY Bond Index and 3.0% for the JPM US Aggregate Bond Index. Over the last 3 years, loans have posted a Sharpe Ratio of 1.0 vs. 0.3 for high yield bonds and 0.83 for the JPM US Aggregate Index. 7.0% 6.0% % Annualized Data 5.0% 4.0% 3.0% 2.0% 1.0% 2.5% 2.5% 1.7% % % Sharpe Ratio 0.0% Leveraged Loans US HY Bonds JPM US Aggregate Bonds yr Annualized Return 3yr Annualized Vol 3yr Sharpe Ratio Source: JPM Leveraged loan Index, JPM US HY Bond Index and JPM US Aggregate Bond Index as of March 31, 2016.

18 Is Now The Right Time to Invest in Loans?

19 Leveraged Credit Market Conditions & Outlook L+2500 L Y Median Loan Spread = L+495 bps 4 Long-Term Loan Default Rate = 2.96% 5 3Y Discounted Loan Spread (bps) L+1500 L+1000 L+500 October Y DM = L+[VALUE]s LTM Defaults = 6.59% April Y DM = L+597 bps LTM Defaults = 1.69% L+0 Jan-99 Jan-00 Dec-00Dec-01Nov-02Oct-03 Oct-04 Sep-05Aug-06Aug-07 Jul-08 Jun-09 Jun-10May-11Apr-12 Apr-13Mar-14Feb-15 Feb-16 3Y Average Discounted Loan Spread 18Y Median Loan Spread 4. As of April 30, Represents average discounted spread for the S&P/LSTA Leveraged Loan Index. Assumes discount from par is amortized evenly over a 3-year life. Excludes facilities in default. 18Y median monthly discounted loan spread represents the median of average discounted loan spreads at month-end beginning in January 1997 through April Source: 2016 Standard & Poor s Financial Services LLC (and its affiliates, as applicable), S&P Capital IQ/SNL Financial LCD Research Represents lagging 12-month default rate for the S&P/LSTA Leveraged Loan Index by principal amount as of April 30, Default rate is calculated as the amount default over the last 12 months divided by the amount outstanding at the beginning of the 12-month period. Represents all loans including loans not included in the LSTA/LPC mark-to-market service. Source: 2016 Standard & Poor s Financial Services LLC (and its affiliates, as applicable), LCD News (May 2, 2016). 1 Long-term loan default rate is calculated as the straight average of the monthly LTM loan default rate for the period from January 1997 through April Past defaults are not an indication of future default rates. Source: Octagon 19

20 Average Bid Price of S&P/LSTA Leveraged Loan, BB & B Loan Indices: January 1, May 6, $ Price $ $ Jan 2014 Mar 2014 Jun 2014 Aug 2014 Nov 2014 Feb 2015 Apr 2015 Jul 2015 Oct 2015 Dec 2015 Mar 2016 S&P/LSTA Loan Index BB Index B Index Sources: S&P/LSTA Leveraged Loan Index and S&P Capital IQ/SNL Financial Leveraged Commentary & Data.

With General Market Sell Off in 2015, Loan

Time in 20 Years Cross-Asset Returns 12-Mo.

0% -6% Lev. Loans 10YR Treas HG Bonds -4.

21 With General Market Sell Off in 2015, Loan Returns Were Slightly Negative for the Second Time in 20 Years Cross-Asset Returns 12-Mo. Lagging Return Volatility 8% 2015 YTD16 5.0% Mar-15 Mar-16 6% 4.0% 4% 2% 0% -2% -4% SD of Return 3.0% 2.0% 1.0% -6% Lev. Loans 10YR Treas HG Bonds -4.64% HY Bond 0.0% HG Bond Lev. Loans 10YR Treas HY Bond Source: S&P/LSTA Leveraged Loan Index & S&P Capital IQ 21

22 Correlations Between Loans and Various Assets 1.00 Credit Suisse Leveraged Loan Index Return Corrolation ( ) Source: Credit Suisse, the BLOOMBERG PROFESSIONAL service, Ibbotson Associates

23 Why Loans Should be a Permanent Allocation in your Fixed Income Portfolio

24 Breakdown of US Fixed Income Asset Class Money Market Fed $2,807B Agencies $1,995B Fixed Income Universe Asset Backed $1,327B Inst. Lev Loans $960B HY Bonds $1,550B US Corporate Debt Inst. Lev. Loans $960 Bil Muni s $3,715B HG Bonds $6,608B HY Bonds $1,550Bil Mortgage Related $8,728B Treasury $13,192B, HG Bonds $6,608 Bil Total Size of the Fixed Income Market $40.9T as of 12/31/15 Source: Credit Suisse 24 Total Size of US Corporate Debt $9.1T as of 12/31/16

25 What are Senior Loans? Revolving Credit Facility Second Lien Loan Institutional Term Loan High Yield Bonds / Converts Equity Senior Secured Junior Second Lien Senior Unsecured/ Subordinated Senior Secured Loans Senior Senior-most debt obligations in capital structure of non-investment grade companies Repaid before other debt obligations and equity holders Secured Secured by collateral, generally a company s assets or stock Higher Recovery Value Floating Rate Pay a base rate (typically higher of LIBOR or a floor) plus an additional spread Coupons adjust in conjunction with changes in short-term interest rates Attractive yields Covenants/Other Always benefit from Incurrence covenants Typically benefit from the protection of maintenance covenants Normally rated by Rating Agency's Source: Credit Suisse 25

26 Position in the Capital Structure Generates Better Credit Outcomes for Leveraged Loans Seniority and security offer meaningful downside protection. Average annual default rates Average recovery rates Average annual principal loss rates % 80% 3% 3.34% 3.29% 65.70% 3% 60% 2.12% 98 bps 2% 2% 40% 39.65% 1.14% 1% 1% 20% 0% Leveraged Loans High Yield Bonds 0% Leveraged Loans High Yield Bonds 0% Leveraged Loans High Yield Bonds 1. JP Morgan par-weighted high yield bond default rates and S&P/LCD par-weighted loan default rates. 2. JP Morgan Default Monitor, 4Q Average issue-weighted recovery rates based on price 30 days after default date Adjusted recoveries are based on year-end prices. 3. Calculated by multiplying Average Annual Default Rate by 1 minus Average Recovery Rate. Source: JP Morgan 26

27 How to Invest in the Loan Market Separately Managed Accounts Customized Large Investment Liquidity Comingled Current Income Medium Investment Size Liquidity Loan Mutual Funds Retail Funds/ETF Small Investment Size Small Institutions/Pensions Insurance Companies High Current Income Capital Preservation Daily Liquidity CLO s Structured Vehicle Different Risk Tranches Floating Rate Notes vs. Equity Primary vs. Secondary 27

28 Why Loans? Why Now? Why Especially Now? 28

Opportunities in the US Loan Market Today. Chris D Auria, LCM Dan McMullen, GSO Steven Oh, Pinebridge John Popp, Credit Suisse Asset Management

Opportunities in the US Loan Market Today Moderator: Panelists: Bram Smith, LSTA Scott Baskind, Invesco Chris D Auria, LCM Dan McMullen, GSO Steven Oh, Pinebridge John Popp, Credit Suisse Asset Management