Markit Commentary
April 4th 2016
Leveraged loans enjoy best quarter since 2012
Leveraged loans returned from the abyss to post their best quarter in three years, and investors
have been quick to gain exposure.
 Markit iBoxx USD Liquid Leveraged Loans Index sees best quarterly return since Q3 2012
 The best performing sectors during the quarter were Energy and Healthcare
 Leveraged loans ETFs had $444m of inflows in March, a 7.88% increase in total AUM
After a volatile start to 2016, investor demand
for leveraged loans returned in Q1 as risky
assets came back into favour. The Markit
iBoxx USD Liquid Leveraged Loans Index
ended the quarter up 2.35% on a total return
basis, the best quarterly return since Q3 2012.
March rally
Leveraged loans witnessed a rather dramatic
turnaround across the first quarter. The asset
class saw returns tumble during the second
half of 2015 in a trend which continued into
the New Year. Factors contributing to the
negative
sentiment
included
falling
commodity prices, tighter monetary conditions
in the US, idiosyncratic risk and heightened
global asset volatility.
The riskiest assets were hit hardest and the
Markit iBoxx USD Liquid Leveraged Loans
Index experienced four consecutive months
of negative returns (November through
February). At one point in February,
leveraged loans were down nearly 2% on a
total return basis. Similarly, US high yield
(HY) bonds, as represented by the Markit
iBoxx USD Liquid High Yield Index, were
down nearly 5%.
US leveraged loans and HY bonds returns
6%
4%
2%
Markit iBoxx USD Leveraged
Loans Index
Markit iBoxx USD Liquid
Leveraged Loan Index
iBoxx $ Liquid High Yield Index
0%
-2%
-4%
-6%
Dec/15
Jan/16
Mar/16
Source:
Markit
Source: Markit
However, a change in sentiment saw the
Markit iBoxx USD Liquid Leveraged Loans
Index rally in spectacular fashion. It returned
2.19% in March, the best month since
October 2011. It also meant that the quarter
ended up 2.35%, the best in three years. The
broader Markit iBoxx USD Leveraged Loan
Index ended the quarter up 1.52%, having
been down nearly 2% in mid-February.
Energy and Healthcare lead
According to Markit’s Loan pricing service,
the rally in leveraged loans was broad based
among rating and maturity cohorts, although
the longest 7-yr tenor saw the biggest
percentage change in average loan spread
during the quarter. 7-yr BB rated loans saw a
12.72% improvement, with average spreads
now at Libor +390bps, while the lowest rated
CCC leveraged loans saw a 11.82% change
at the 7-yr tenor, although spreads remain
above Libor +1000bps.
North American sectors broadly outperformed
their European counterparts across most
Markit Fixed Income Research
sector and ratings. The best performing
sector during the quarter was Healthcare,
which saw its BB+ rated North American
leveraged loans tighten 21bps. The bounce in
crude oil prices also boded well for the
Energy sector, with BB+ and BB- leveraged
loans in North America tightening 15bps and
13bps respectively. The riskiest loans (CCC+)
continued to struggle however, with most
sectors seeing significant spread widening
across the quarter.
bonds, whose ETFs saw over $7bn of inflows
across the quarter.
Investor sentiment turns
Senior Loan ETFs inflows/outflows in 2016 ($m)
500
400
300
200
100
0
-100
-200
-300
-400
January
February
March
Source: Markit
The new found risk on sentiment in March
enticed investors to add to their risk exposure
through leveraged loans and US HY bond
exchange traded funds (ETFs). $444m of new
money flowed into ETFs tracking US
leveraged loans, a 7.88% increase in assets
under management. However, March’s
positive flows were not enough to cancel out
the outflows seen in January and February,
as the first quarter of 2016 ended with overall
outflows. Investors much preferred US HY
Neil Mehta
Fixed Income Analyst
Markit
Tel: +44 207 260 2298
Email: [email protected]
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