Chart of the week

As investors seek quality, broadly syndicated loans wilt

As investors seek higher quality investments, this week’s chart looks at the loan market’s gradual move down in quality.

August 5, 2022 | 2 minute read

Broadly syndicated loan market exposure by rating

Source: S&P/LSTA Leveraged Loan Index, ICE BofAML U.S. High Yield Index, as of July 31, 2022.  

  • Rising rates pressured higher-rated, duration-sensitive bonds early this year. As the market narrative shifted from concerns over rising rates to global growth, investors increasingly favored higher quality assets. Since April, BB-rated bonds have been the top performer while lower-rated credits (bonds and loans) have fared worst.
  • Despite rising rates, loans, typically a beneficiary in such environments given their floating rate nature, are down -2.3% year to date. The decline has been driven in large part by the deterioration in the credit quality of the loan market.1
  • For example, the rise of loan-only issuance (capital structures where there is no other debt subordinate to the loans in a company’s capital structure), which represents 58% of the loan market today compared to just 35% 10 years ago, has skewed the market down in quality.1 As a result, B- or CCC-rated loans represent nearly 70% of the loan index today.1 In contrast, higher-quality BB-rated bonds make up more than half (53%) of the high yield bond index.1
  • Recovery rates represent another sharp divergence between loans and bonds. Loan recovery rates, which measures the percentage of a loan’s initial par value repaid to investors in the case of a default or bankruptcy, have trended notably lower, from an average of 70% throughout the period from 2000—2010 to approximately 63% over the last 12 months.1 High yield bond recovery rates have increased from their 25-year average of approximately 40% to 68% today.1
  • Despite rising market uncertainties, corporate fundamentals remain strong and credit markets are significantly larger and more diverse today compared to just 10 years ago. To access the greatest relative value return opportunities within today’s environment, however, investment selectivity and flexibility remain critically important.

  • Senior secured loans represented by the S&P/LSTA Leveraged Loan Index; high yield bonds represented by the ICE BofAML U.S. High Yield Index. As of July 31, 2022. Current recovery rates represent the trailing 12-month recovery.

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