The average price at which U.S. leveraged loans entered the secondary trading market jumped for the second consecutive month in January amid extremely strong conditions in the segment.

The average break price hit 100.34% of par in January, from 99.91 in December, according to LCD, with a wave of loan repricing transactions gripping the market as investor demand in the floating-rate asset class soared and the share of loans in the secondary priced at par or better reached its highest point since the start of the market turmoil, just before the onset of the COVID-19 pandemic in early March.

Leveraged loan issuance was extremely strong to start off the new year, with the volume of new institutional term loans allocating to the secondary reaching $29.4 billion, up from $26.3 billion in December. A total of 62 loans were allocated in January, versus 43 in December. Of the 62 loans that allocated last month, however, 29 were repricing transactions, which are not included in the new-issue volume figure, meaning the $29.4 billion was spread across the remaining 33 non-repricing transactions.

In a leveraged loan repricing, a borrower returns to market to reduce the Libor spread on an existing loan, taking advantage of investor demand, as opposed to the more cumbersome and expensive process of undertaking a new loan or a refinancing proper.

The explosion in repricings last month is by far the most the market has seen since the repricing wave began in January 2020. In total, $69.9 billion of repricings launched into the new-issue market in January 2021, with $40.9 billion across 29 deals freeing for trading during the month. In January 2020, $95 billion launched, $54.2 billion of which freed to trade in that month, across 32 loans.

Away from repricing transactions, new-issue leveraged loan volume in January, which still hit its second-highest total since the market took a hiatus in March and April 2020, was fairly evenly split among use of proceeds. Some 29% represented refinancings, 32% backed buyouts, and 18% supported other M&A activity. The two largest deals of the month, however, Citadel Securities LLC's $3 billion term loan due February 2028 (L+250, 0% Libor floor) and PPD Inc.'s $3.05 billion term loan due 2028 (L+225, 0.50% Libor floor), were both used to refinance existing term loans.

Given the strong demand for loans in January, price flex activity held in favor of issuers last month, though the share of borrower-friendly flexes did ease from the previous month as a larger number of deals finalized pricing within the bounds of initial price talk. Of the 33 deals entering the secondary that flexed last month, 32 shifted tighter in favor of issuers, while for the second month in a row just one deal saw an investor-friendly flex. However, 29 of the loans allocated in the month did not have the pricing or discount changed during syndication and subsequently priced within initial price guidance. This brought the percentage of deals flexing tighter to 52% in January, from 72% in December, while the percentage of deals flexing wider remained at 2%.

The credit quality of deals allocating in January was virtually unchanged, with deals rated B+ or higher accounting for 44% of volume, and those with a B- rating on at least one side accounting for 41% of volume, compared to 40% and 43% in December, respectively.

Once in the secondary, loans that were allocated in January performed well, gaining 22 basis points from the average break price to 100.56 at month-end. That compares to a decline of 31 bps in December from the average break price to 99.60 at month-end.

Again, loans in January entered an extremely strong secondary market, with the S&P/LSTA Leveraged Loan Index returning 1.19% and reaching several pre-pandemic measures for the first time since the beginning of last year. Investor demand has buoyed the market so far in 2021, evidenced by the four straight weeks of retail inflows to U.S. loan funds through Feb. 3 for a total of $4 billion over that span, according to data from Lipper. That stands in stark contrast to 2020, when loan funds booked a net outflow of roughly $19 billion, as investors showed a preference for fixed-rate high-yield bonds.

The average new-issue price of deals allocating continued to march higher in January, reaching 99.7% of par, versus 99.1 in December, as the share of repricing transactions, which typically price at par, skyrocketed and the overall firm tone of the market helped push new-issue prices to their highest point since February 2020.

The gap between the average new-issue price and the average break price eased to just 64 bps in January, after widening to 81 bps in December.

Finally, the average yield to maturity and spread to maturity of loans breaking in January continued lower, with the average yield to maturity plunging to 4.20% and the spread falling to L+350, its lowest level since the onset of the repricing wave at the beginning of 2020. Meanwhile, the average yield to maturity of deals allocating in January is the lowest monthly figure since LCD began tracking this data in 2006.