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SPDR® Blackstone Senior Loan ETF (SRLN) – Q2 2021 Commentary

During the second quarter of 2021, SRLN outperformed the Markit iBoxx USD Liquid Leveraged Loan Index by 131 basis points (bps) and outperformed the S&P/LSTA U.S. Leveraged Loan 100 Index by 96 bps on a NAV basis.


Performance
During the second quarter, SRLN outperformed its benchmarks largely due to its credit selection within assets rated CCC and single-B, including credits with exposure to an economic reopening. Many of these were added at discounted levels during 2H 2020 and have outperformed as line-of-sight towards a normalization has progressed. By sector, positive credit selection within the consumer discretionary, industrials and healthcare sectors also contributed to relative outperformance, with particularly strong alpha contribution in these sectors from AMC Entertainment, Lumileds, Cineworld, American Airlines and Travelport.* SRLN received strong inflows in the second quarter, totaling $2.4 billion and bringing the year-to-date total to $4 billion as of June 30th.1

*This information should not be considered a recommendation to invest in a particular sector shown. It is not known whether the sectors shown will be profitable in the future

Standard Performance

Quarter in Review
US loans continued their strong performance in the second quarter of 2021 returning 1.47%, driven by a broad rally in risk markets fueled by economic expansion and continued government stimulus. Interest rates moderated toward the end of the quarter after the 10-year Treasury touched 1.73% before ending June at 1.45%, down 24 bps since the end of 1Q.2

Demand for loans remains robust with net collateralized loan obligation (CLO) issuance totaling $42.6 billion in the second quarter and retail loan funds posting inflows of $12.7 billion.3 The pace of CLO issuance continued to set records in the second quarter, with volumes up 127% year over year and the global CLO market now topping $1 trillion in size. With over 200 CLO warehouses currently outstanding, further growth is ahead.4

Credit fundamentals continue to improve for loan issuers after a strong 1Q earnings rebound and slowing debt growth. 2Q earnings tailwinds, while not yet announced, are expected to show further improvement.

The second quarter caps the most modest first half of a calendar year for defaults and distressed transactions in the credit markets since 2011. The loan par-weighted default rate ended the quarter at 1.11%, down 284 bps for the year.5 Default rates are expected to remain benign through at least 2023 as issuer ratings upgrades outpace downgrades by a record pace of 2:1.

Upgrade to Downgrade Ratio by Issuer

Portfolio Positioning and Outlook
SRLN remains overweight single-B and CCC-rated assets relative to benchmarks but began reducing exposure to some of these assets toward the end of the quarter as we continue to adjust portfolio positioning based on latest market views.

While loan market technicals remain constructive with continued demand being driven by new and existing CLOs as well as loan mutual fund and ETF inflows, we are seeing signs of retrenchment in the reopening trade with debt of certain movie theaters, airlines and travel companies all trading lower in early July in reaction to vaccine hesitancy and the proliferation of SARS-CoV-2 variants. As expected, we are also seeing positive signs that loan supply is returning towards historically normal levels following depressed issuance during much of 2020.

We expect interest rates to rise again later this year and for investor demand for floating rate loans to remain strong as loans have historically performed well in periods of rising interest rates.

Appendix

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