Key Takeaways
- After leveling out last month, the average bid on all loans in our data set rose to 98.91 as of March 15, marking its highest level since we started sampling in October 2022.
- The rally includes sponsored and not sponsored loans, with average bids reaching highs of 98.71 and 99.29, respectively, for first liens.
- Market dynamics continue to improve, and the bid-ask spread for sponsored first liens is now just 5 basis points (bps) wider than not sponsored first liens at 72.5 bps and 67.9 bps, respectively.
- The distressed ratio for all loans we cover fell to 13.2%--the lowest level in our coverage.
With the spring equinox marking the end of winter, loan market participants appear optimistic. Loan secondary market pricing has remained strong this month, with healthy market dynamics and evidence of resilient aggregate demand helping the average bid on all first-lien loans in our data set (see Appendix) to reach 98.91 on March 15. This marks the highest level since we began surveilling this loan data in October 2022.
Chart 1
However, lackluster merger and acquisition (M&A) activity is limiting market growth, and market participants have expressed concern about private equity's ability to exit existing longstanding investments due to private equity's increasing use of secondaries, continuation funds, and fund financing to extend hold periods and improve liquidity.
Sponsored transactions account for two-thirds of the tranches in our coverage. While secondary pricing for sponsored transactions has strengthened over the past year, it continues to lag pricing for not sponsored transactions.
The average bid for sponsored tranches started 2023 at a 257-bp discount to not sponsored tranches, and by year-end gained 393 bps to rise to 98.26 (ending up 174 bps below par). The average bid for not sponsored tranches rose 224 bps to end at 99.15 (85 bps from par and 88 bps above the average for sponsored transactions).
So far in 2024, year-to-date pricing has remained relatively steady, with the average pricing for sponsored up 45 bps and not sponsored 14 bps since Dec. 29. Still, not sponsored deals are retaining their premium, ending the week of March 15 about 57 bps above the average for sponsored.
The gap between sponsored and not sponsored pricing is also notable by the share of loans priced at 98.00 or higher. At the start of 2023, only 14% of sponsored transactions were priced at that level--less than a third of the not sponsored's 48% share. Over the last year, sponsored's share of loans priced 98.00 or above rose across the market and the gap with not sponsored loans shrank tremendously, ending the year with 71% of sponsored and 85% of not sponsored.
Through March 15, 2024, the shares of loans at 98.00 or higher have risen even more as the market reopened, with investors anticipating sunnier skies ahead. The share for sponsored deals rose to 79% and not sponsored to 87%. However, the gap remains, reflecting the issues casting a shadow over private equity's strategy for exiting longstanding investments.
Chart 2
Of course, the implications of future lower interest rates have yet to materialize, and M&A needs to reopen for the market to fully understand the future effects of interest rate policy on appetite for M&A. Until then, market participants are likely to remain reserved.
Markets Expect Blue Skies Ahead
Federal Reserve Chair Jerome Powell's message in his March 20 press conference, particularly the emphasis placed on the Fed's dual mandate (to balance its pursuits of maximum employment and price stability), gives the market more clarity around future credit conditions. Positive trends in loan secondary markets since 2022 clearly reflect a more optimistic outlook, supported by developments in the macro-credit environment during this time.
We will be watching closely as the new normal in credit markets takes hold and markets adjust to incoming data. So far in March, the price action shows markets participants voting for "blue skies" on the horizon, to the tune of Willie Nelson.
Market Dynamics Continue To Improve
In 2023, the bid-ask spread on all first liens in our coverage tightened 33 bps, ending the year at 85.6 bps. The gap between sponsored and not sponsored also tightened during the year. Sponsored first liens began 2023 with a bid-ask of 127.5 bps--23 bps above that for not sponsored first liens (104.6 bps). During the year, that gap shrank to just 11 bps as the bid-ask for sponsored loans tightened 38 bps to 89.8 bps while not sponsored loans tightened 26 bps to 78.4 bps.
Markets appear to be growing more comfortable with the reality that rates will remain higher for longer. In 2024, the average bid-ask spread for all first liens we cover has tightened another 15 bps to 70.9 bps as of March 15, while the gap in the average bid-ask spread between sponsored and not sponsored loans has narrowed further. The bid-ask for sponsored loans at 72.5 bps (down 17 bps year to date) is now just 5 bps wider than that for not sponsored first liens at 67.9 bps (down 10 bps year to date).
Chart 3
Meanwhile, the distressed ratio for all loans in our data set resumed tightening in March, reaching 13.2% as of March 15--the lowest level for the distressed ratio in our coverage. Additionally, the distress ratio for sponsored loans reached a new low as of March 15, at 14.1%, while the distress ratio for not sponsored loans (at 11.4%) is just 79 bps above its tightest level from Feb. 2, 2024.
Chart 4
US$ First Liens Reach New High
The average bid for U.S. dollar first liens reached a new high of 99.03 as of March 15. The average bid improved slightly for both dollar and euro first liens since March 1, with the average bid up 14 bps and 7 bps, respectively. The average bid on dollar first liens remains roughly 40 bps higher than euro first liens.
Chart 5
Secondary market liquidity for euro first liens resumed tightening over the past two weeks, with the bid-ask spread tightening 4.4 bps since March 1 to 85.6 bps. The bid-ask spread for dollar first liens continues to grind tighter and is currently 65.7 bps.
Chart 6
The distress ratio for dollar first liens at 14.3% has also reached a new low. The distress ratio for euro first liens at 9.7% is just slightly higher than its lowest level of 9.3% from Feb. 23, 2024.
Chart 7
Appendix: Our Surveillance Of Loan Secondary Market Liquidity
S&P Global Ratings Credit Research & Insights has established a proprietary analysis of secondary market data for leveraged loans and is publishing biweekly research on secondary market pricing to provide transparency on evolving market dynamics. For this biweekly research, we aggregate weekly datasets from S&P Global Market Intelligence Loan Pricing Data, combining features from S&P Global Market Intelligence Loan Reference Data.
To create the various aggregates included in our analysis (e.g., U.S. dollar first liens, second liens, distressed, etc.), we screen leveraged loan tranches in the dataset on several criteria, including market depth, facility currency, lien type, and spread, among others.
Our liquidity research enables bespoke risk assessment within leveraged finance markets. By tracking secondary market pricing metrics—such as the bid/ask spread, bid depth, and distressed ratios—in various cuts of the data, we get a clearer signal on overall market health and current market liquidity. Our myriad approach to aggregating the data provides a multi-faceted perspective on liquidity risk in the market.
For the purposes of our research, we define distressed loans as those with spreads greater than 1,000 basis points.
All loans in our dataset are defined as all US$/€ first-lien loans meeting the sampling criteria.
To view these exhibits and related research, visit: spglobal.com/ratings/PrivateMarkets
This report does not constitute a rating action.
| Credit Research & Insights: | Jon Palmer, CFA, Austin 212 438 1989; jon.palmer@spglobal.com |
| Ruth Yang, New York (1) 212-438-2722; ruth.yang2@spglobal.com | |
| Molly Mintz, New York; Molly.Mintz@spglobal.com |
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