Loans performed in line with other key fixed income asset classes in the first quarter of 2023. SRLN returned 2.01% at NAV.1
Despite a positive first quarter return, SRLN underperformed its benchmarks primarily due to credit selection within loans. The fund’s strategic allocation to high yield bonds was also a slight detractor. SRLN modestly added back to risk assets in the first quarter. The fund continues to maintain an overweight to higher-quality credits while maintaining a yield similar to the benchmark.
The top contributors to total return in the first quarter were Asurion LLC, LBM Acquisition LLC, and HUB International Ltd. The top detractors were Lumen Technologies Inc, Carestream Health Holdings Inc, and Triton Water Holdings Inc.
Retail demand for loans remained soft during the quarter likely due to investor concerns about slowing economic growth. Loan mutual funds and ETFs experienced $10.9 billion in net outflows with $1.0 billion leaving ETFs and $10.0 billion leaving mutual funds. SRLN recorded $833 million in outflows during the quarter but remains the largest loan ETF.2
|Top 10 Holdings||Coupon||Maturity Date||Weight (%)|
|MEDLINE BORROWER LP AKA MEDLINE INDUSTRIES||8.0902||10/23/2028||1.82|
|UKG INC AKA ULTIMATE KRONOS/UKG||8.0317||5/4/2026||1.67|
|ATHENAHEALTH GROUP INC.||8.2591||2/15/2029||1.63|
|NEW RED FINANCE,INC. AKA BURGER 1011778 B.C. ULC/ RESTAURANT BRANDS||6.5902||11/19/2026||1.62|
|PILOT TRAVEL CENTERS LLC||6.907||8/4/2028||1.58|
|UNITED AIRLINES, INC. AKA CONTINENTAL||8.5676||4/21/2028||1.58|
|AMERICAN AIRLINES, INC AKA ADVANTAGE||9.5577||4/20/2028||1.50|
|BROOKFIELD WEC HOLDINGS INC AKA WESTINGHOUSE ELECTRIC/WESTINGHOUSE||7.5901||8/1/2025||1.42|
As of March 31, 2023, the top ten holdings accounted for 16.33% of the fund’s investments. The Fund Top Holdings are as of the date indicated, are subject to change, and should not be relied upon as current thereafter.
|Ticker||Name||YTD (%)||Annualized||Inception Date||Gross Expense Ratio|
|1 Year (%)||3 Year (%)||5 Year (%)||10 Year (%)||Since Inception (%)|
|SRLN (NAV)||SPDR® Blackstone Senior Loan ETF||2.01||-1.98||5.86||2.5||-||2.58||4/3/2013||0.70|
|SRLN (MKT)||SPDR® Blackstone Senior Loan ETF||2.50||-2.23||6.44||2.45||-||2.55|
|Markit iBoxx USD Liquid Leveraged Loan Index||3.30||2.13||5.61||2.33||2.51||2.51|
|Morningstar LSTA US Leverage Loan 100 Index||2.94||2.42||6.50||3.37||3.31||3.31|
|BKLN (NAV)||Invesco Senior Loan ETF||3.73||2.96||4.32||2.44||2.40||2.87||3/3/2011||0.66|
|BKLN (MKT)||Invesco Senior Loan ETF||4.29||3.12||4.20||2.42||2.38||2.82|
Source: State Street Global Advisors and Invesco Senior Loan ETF Factsheet, as of March 31, 2023. Past performance is not a reliable indicator of future performance. Investment return and principal value will fluctuate, so you may have a gain or loss when shares are sold. Current performance maybe higher or lower than that quoted. All results are historical and assume the reinvestment of dividends and capital gains. Visit ssga.com for most recent month-end performance. The gross expense ratio is the fund’s total annual operating expense ratio. It is gross of any fee waivers or expense reimbursements. Performance returns for periods of less than one year are not annualized. The market price used to calculate the Market Value return is the midpoint between the highest bid and the lowest offer on the exchange on which the shares of the fund are listed for trading, as of the time that the fund’s NAV is calculated. If you trade your shares at another time, you returns may differ.
The gross expense ratio is the fund’s total annual operating expenses ratio. It is gross of any fee waivers or expense reimbursements. It can be found in the fund’s most recent prospectus.
A risk-on rally ensured a strong start for the loan market in 2023, only to be stymied by the March banking sector stress. Loans performed in line with other key fixed income asset classes with a 3.2% return for the quarter.3
Performance came against a backdrop of ongoing interest rate volatility as the Federal Reserve (Fed) continued to take base rates higher to tamp down persistent inflation. The Fed is expected to ease the pace of hikes in the face of financial sector stress, and followed December’s 50 bps hike with two smaller 25 bps hikes in the first quarter. The market is now pricing in a terminal rate under 5% and rate cuts before the end of the year, although we remain of the view that rates will need to stay at higher levels for longer.4
Loan market issuance improved at the start of the quarter, pushing supply to $49.5 billion versus $35.7 billion in the fourth quarter and $21.1 billion in the third quarter.5 Despite this uptick, this was still the lightest first quarter issuance since 2016.6 Issuers used amend-to-extend transactions to address near-term maturities and reduce the elevated amount of institutional loans due to mature in the next two to three years.7
In terms of demand, collateralized loan obligation (CLO) supply started strongly in 2023 with issuers pricing $33.6 billion across 77 deals, ahead of last year’s pace.8 Demand for CLO AAAs from major Japanese investors has not yet returned, but other buyers have picked up the slack with many of the AAA tranches being syndicated across multiple accounts.9 However, the demand technical wasn’t all constructive given $10.9 billion leaving loan funds throughout the first quarter, on top of the $12.7 billion in the prior quarter.10
The March weakness tested the resolve of the loan market as average loan prices fell by 2 points to their lowest level since 2022 but were able to retrace a point in the final week to close at $93.40.11
Additionally, the dispersion theme experienced in 2022 reemerged as risk-off sentiment returned with the banking sector fallout. Buyers returned as contagion concerns subsided towards the end of the month, although we remain vigilant for additional volatility.
Loan Returns by Rating:
To put the first quarter of 2023 in context, we’re reminded of the quote “if there’s one thing that is certain, it is uncertainty.” A quarter that was defined by regional bank failures, including Silicon Valley Bank (SVB) and Signature Bank, and a merger of duress between Credit Suisse and UBS, was also marked by stubbornly high core inflation. Prior to those events however, the risk rally was on, with CCC assets flipping the narrative from 2022, outperforming higher-rated credits.12 While this is still the case at the end of the quarter, the returns have taken a sharp turn back.
Yet, it is during these periods of uncertainty where the right strategy may drive consistent and attractive returns. We note that based on historical precedent, floating rate loans tend to outperform both fixed rate and equities during Fed hiking periods.13
We believe the Fed and European Central Bank (ECB) have further to go to combat inflation, supported by observations from across our investment portfolio. Blackstone regularly surveys the CEOs of our portfolio companies to get an aggregate view of current market conditions. Notably, we continue to see wage inflation, which, while down from last year, remains higher than pre-COVID averages. Also, in certain circumstances we are beginning to see sellers accept lower prices in exchange for certainty of orders—which is a turn from a year ago. In looking through to our ports and warehouses, we observe ongoing and exceptionally strong warehouse performance, while the flow of goods continues to build, adding to the potential for excess inventory, which is also deflationary. Suffice to say, we don’t believe a Fed cut is necessarily imminent and continue to focus on investing in the highest quality businesses.
That said, the contraction in credit conditions due to the banking stress could, in our view, bring forward the point of peak interest rates, while also accelerating a potential recession in the US and Europe.
As downgrades continue to outpace upgrades, it is the exposure to CCCs that could become an issue for loan portfolios. That is why our exposure to lower-rated credits priced less than $80 is less than that of the loan index.14
Technicals will remain a key driver of performance in our view, although the picture here remains unclear. Primary loan and high yield supply is expected to remain subdued over the near term, with the focus on amend-to-extends.15
In our view senior secured loans, which are first in line for repayment, remain both defensive and attractive; yields are compelling.16
We continue to believe robust credit selection underpinned by our fundamental bottom-up approach to investing will help us preserve capital as we reposition portfolios, rotate into higher quality issuers and prune risk. Importantly, we believe these challenges and market dispersion will bring new opportunities to deploy capital and drive performance.
1 State Street Global Advisors, as of March 31, 2023.
2 Lippper, Blackstone Credit, as of March 31, 2023.
3 Bloomberg, as of March 31, 2023.
4 Bloomberg WIRP, as of March 31, 2023.
5 LCD, as of March 31, 2023.
6 LCD, as of March 31, 2023.
7 LCD, as of December 31, 2022.
8 LCD, as of March 31, 2023.
9 LCD, as of March 31, 2023.
10 LCD, as of March 29, 2023.
11 Morningstar, LSTA US Leveraged Loan Index, as of March 31, 2023.
12 Morningstar LSTA Leveraged Loan Index as of 3/31/23
13 Morningstar, LSTA US Leveraged Loan Index, Bloomberg US HY Index, Bloomberg US Corporate Index.
14 Morningstar, LSTA US Leveraged Loan Index, as of March 31, 2023.
15 LCD, as of March 31, 2023.
16 Pitchbook LCD, Quarterly Review, First Quarter 2023.
Basis Point (bps)
A unit of measure for interest rates, investment performance, pricing of investment services and other percentages in finance. One basis point is equal to one-hundredth of 1 percent, or 0.01%.
Collateralized Loan Obligation (CLO)
Securities that are backed by a pool of debt, typically business loans, that are grouped by credit quality into tranches.
Markit iBoxx USD Liquid Leveraged Loan Index
A barometer of the loan market which is comprised of about 100 of the most liquid, tradable leveraged loans, as identified by Markit’s Loans Liquidity service.
Floating-rate debt issued by corporations and backed by collateral, such as real estate or other assets.
Important Risk Disclosure
Investing involves risk including the risk of loss of principal.
This communication is not intended to be an investment recommendation or investment advice and should not be relied upon as such.
The views expressed in this material are the views of Portfolio Management Team at Blackstone Capital, LLC through the period ended March 31, 2023 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Diversification does not ensure a profit or guarantee against loss.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.
All information is from SSGA unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
The value of the debt securities may increase or decrease as a result of the following: market fluctuations, increases in interest rates, inability of issuers to repay principal and interest or illiquidity in the debt securities markets; the risk of low rates of return due to reinvestment of securities during periods of falling interest rates or repayment by issuers with higher coupon or interest rates; and/or the risk of low income due to falling interest rates. To the extent that interest rates rise, certain underlying obligations may be paid off substantially slower than originally anticipated and the value of those securities may fall sharply. This may result in a reduction in income from debt securities income.
Investments in Senior Loans are subject to credit risk and general investment risk. Credit risk refers to the possibility that the borrower of a Senior Loan will be unable and/or unwilling to make timely interest payments and/or repay the principal on its obligation. Default in the payment of interest or principal on a Senior Loan will result in a reduction in the value of the Senior Loan and consequently a reduction in the value of the Portfolio’s investments and a potential decrease in the net asset value (“NAV”) of the Portfolio.
Prior to 02/26/2021, the SPDR Blackstone Senior Loan ETF was known as the SPDR Blackstone / GSO Senior Loan ETF.
The fund is actively managed. The sub-adviser’s judgments about the attractiveness, relative value, or potential appreciation of a particular sector, security, commodity or investment strategy may prove to be incorrect, and may cause the fund to incur losses. There can be no assurance that the sub-adviser’s investment techniques and decisions will produce the desired results.
Actively managed funds do not seek to replicate the performance of a specified index. The fund is actively managed and may underperform its benchmarks. An investment in the fund is not appropriate for all investors and is not intended to be a complete investment program. Investing in the fund involves risks, including the risk that investors may receive little or no return on the investment or that investors may lose part or even all of the investment.
Bonds generally present less short-term risk and volatility than stocks, but contain interest rate risk (as interest rates raise, bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.
Investing in high yield fixed income securities, otherwise known as "junk bonds", is considered speculative and involves greater risk of loss of principal and interest than investing in investment grade fixed income securities. These Lower-quality debt securities involve greater risk of default or price changes due to potential changes in the credit quality of the issuer.
There can be no assurance that a liquid market will be maintained for ETF shares.
The trademarks and service marks referenced herein are the property of their respective owners. Third party data providers make no warranties or representations of any kind relating to the accuracy, completeness or timeliness of the data and have no liability for damages of any kind relating to the use of such data.
State Street Global Advisors Funds Distributors, LLC is the distributor for some registered products on behalf of the advisor. SSGA Funds Management has retained Blackstone Liquid Credit Strategies LLC as the sub-advisor. State Street Global Advisors Funds Distributors, LLC is not affiliated with Blackstone Liquid Credit Strategies LLC.
The funds presented herein have different investment objectives, costs and expenses. SRLN seeks to provide current income consistent with the preservation of capital. BKLN seeks to track the investment results (before fees and expenses) of the Morningstar LSTA US Leveraged Loan 100 Index. Each fund is managed by a different investment firm, and the performance of each fund will necessarily depend on the ability of their respective managers to select portfolio investments. These differences, among others, may result in significant disparity in the funds' portfolio assets and performance. For further information on the funds, please review their respective prospectuses.