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.
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
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.
1 Morningstar Asset Flows June 30, 2021
2 S&P/LSTA Leveraged Loan Index sourced from Bloomberg as of 6/30/2021
3 LCD as of June 30, 2021
4 Credit Suisse, Bank of America as of June 30, 2021
5 J.P. Morgan Default Monitor July 1, 2021
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%.
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.
Investing involves risk including the risk of loss of principal.
Diversification does not ensure a profit or guarantee against loss.
This communication is not intended to be an investment recommendation or investment advice and should not be relied upon as such.
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 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. Securities with floating or variable interest rates may decline in value if their coupon rates do not keep pace with comparable market interest rates. Narrowly focused investments typically exhibit higher volatility and are subject to greater geographic or asset class risk. The fund is subject to credit risk, which refers to the possibility that the debt issuers will not be able to make principal.
Prior to 02/26/2021, the SPDR Blackstone Senior Loan ETF was known as the SPDR Blackstone / GSO Senior Loan ETF.
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.