Europe's secondary loan market stabilised by mid-week, following a sharp fall on Aug. 5 that brought the worst daily return in the Morningstar European Leveraged Loan Index (ELLI) since October 2023.
The fall came on the back of a vicious equity sell-off, and resulted in a one-day decline in the ELLI's market-value return of 0.32%. Coming at the start of the usual European August holiday — with one source estimating roughly 50% of market players are now away from their desks — trading volumes were muted. Meanwhile, the lower prices were also an opportunity for ramping CLOs to step in, sources added.
Market insulation
These factors helped to insulate European credit markets from the worst effects of what was primarily an equity led sell-off, which took the Nikkei down by 13% on Aug. 5 for its worst session since 1987. Rates also tightened, helping to limit the falls in high yield — which are now only marginally changed on a cash-price basis, sources say. The iTraxx Crossover was more volatile and has generally traded in a 330-350 range this week, having been around 280-300 through most of July.
Loans are technically well supported in Europe and quickly stabilized, with the ELLI recording market returns of 0.06% on Aug. 6, and 0.04% on Aug. 7.
Small-fry
What's more, the Aug. 5 loss is small-fry compared with the record falls in European secondary loan prices that followed the start of Covid-19 lockdowns back in 2020. This event brought the worst performance since the ELLI began daily calculations in 2013, with record consecutive daily losses of close to 3%. And in September 2022, the fallout from the UK's mini-budget wiped 1.01% from the index in a single day.
In contrast, this week’s decline merely represents the biggest drop in the index since October 2023, when inflation fears rattled investors.
The Aug. 5 fall sent the average bid for the index down 29 bps, to close at 97.61. This only takes the ELLI back to levels last seen at the start of July, and the index had risen to 97.71 by Wednesday's close.
Context is king
Putting all this into context, the daily drop for Aug. 5 fits just inside the top-45 worst daily performances for the ELLI since March 2020. The selling was felt more deeply in the US, with the Morningstar LSTA US Leveraged Loan Index losing 0.55% in the same session. This is the worst daily return for that index since the collapse of Silicon Valley Bank in March 2023, and the fifth-worst day for the overall index since April 2020.
Some of the European names worst-hit by the recent volatility are those credits more closely linked with consumer spending. B-minus rated holiday rentals business Wyndham Vacations, for example, was the worst performer on Aug. 5,(losing 1.06% in market returns). US-based companies were also marked down, with B rated Kohler Energy losing 1.026%.
Of the 389 priced facilities in the ELLI, 336 declined on Aug. 5, while 26 advanced and 27 held neutral. As for how this action affected broad ratings categories, single-B rated names traded down 0.26% on average, while double-Bs lost 0.27%. CCCs were the best performers, losing 0.016% on average.
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