NEW YORK, Nov 27 (LPC) - The US leveraged loan market is seeing continued weakness in secondary prices, which could set the scene for a tense run up to the end of the year after the largest outflow from loan mutual funds in almost three years.
The SMi100, which tracks the 100 most widely held loans, fell to 97.57 on Monday after the Thanksgiving holiday from 97.95 on November 19.
The index started the month at 98.35 and has lost 78bp so far in November amid continued equity and bond market volatility.
“There has been some continued softness” a secondary loan trader said. “It’s been weak and volatile on light volume.”
The less reactive loan market is succumbing to the volatility that has plagued the equity markets for the last two months, and softer secondary prices will continue to put pressure on the primary loan market.
The Dow Jones Industrial Average has fallen about 7.5% since the start of October to Monday, and high-yield bonds have a negative 1.186% return this month, according to ICE BAML data.
Investors pulled US$1.7bn from loan mutual funds in the seven days ending November 21, in the largest outflow from the funds since December 2015, according to Lipper data.
About US$1.1bn was pulled from mutual funds with the rest from Exchange-Traded Funds (ETFs).
A strong Collateralized Loan Obligation (CLO) market is countering retail volatility. About US$3.4bn of US CLOs were arranged last week, pushing issuance to more than US$121bn, in the second-largest year on record after US$123.6bn in 2014, according to LPC Collateral data.
Investors were hopeful that Black Friday, traditionally one of the busiest shopping days of the year as stores offer bargains the day after Thanksgiving, would give a much needed boost to retailers. The sector has been battered by falling sales amid increased competition from online retailers such as Amazon.
Belk and JC Penney, both loan market issuers, were among the best stores to visit for deals, according to personal finance website WalletHub, offering an average discount of at least 62.1%.
Moody’s Investors Service said it is expecting growth of 5% to 6% in retail sales this holiday season on a stronger US economy, according to a November 21 report.
The bump would be welcomed by the market that has seen 14 retailers file for bankruptcy this year through the end of October including Sears, according to a November 8 report from the ratings firm.
David’s Bridal , which filed for Chapter 11 this month, is not included in that tally.
The average bid for retail sector loan borrowers tracked by LPC fell to 95.6 on Black Friday after starting last week at 95.9. The index hit a 2018 peak of 97.2 in October. (Reporting by Kristen Haunss Editing by Michelle Sierra and Jon Methven)