During the first four months of 2021, the S&P/LSTA U.S. Leveraged Loan Index returned 2.3% while simultaneously absorbing record new supply, which expanded the total par amount outstanding in the index to a new record of $1.22 trillion at the end of April. Through April 30, LBO-related loan supply of $56.7 billion was running at the highest pace since the Global Financial Crisis and the second-highest pace ever behind the $61.4 billion issued in 2007. Even more impressive was the $103.8 billion in total M&A volume, which consists of LBO financings plus corporate M&A and sponsored tack-on acquisitions; this was running 13.5% ahead of the volume recorded during the first four months of 2018, which went on to set an annual record for M&A loan volume.
As loan supply set records in the first four months of the year, so too did new demand for loans. U.S. CLOs, which purchased 72% of loan new issue supply over the past year, are off to their strongest start to a year since the Global Financial Crisis with $53.4 billion priced through April 30. At the same time, after two years dominated by outflows, loan mutual funds and ETFs (which purchased 15% of loan new issue supply over the past year) are riding an inflow wave of retail investor cash, with net inflows in 16 of 17 weeks through April 28, totaling $14 billion (compared to a $19.1 billion outflow for full-year 2020).
Thus far in May, the demand side of the loan market has been consistent with the aforementioned trajectories, but supply has evaporated. The loan markets’ net forward calendar, which represents all institutional loans in the pipeline net of anticipated repayments, flipped to net negative territory for the first time since early January. The amount of expected repayments currently outstrips new supply by about $2 billion (compared to net positive figures between $12 billion and $25 billion to start this year). Although we expect that recently announced M&A will lead to a return of strong new supply volume for the U.S. loan market, this current supply respite is creating a favorable technical backdrop for loans during a period of rising broad market volatility. Combined with the healthy fundamental backdrop, supported by leveraged loan upgrades outpacing downgrades at the fastest rate since 2012 and the loan index default rate expected to fall below 1% in the coming months, the loan market appears setup to continue its positive performance in the second half of 2021.
* all data sourced from S&P Global Market Intelligence