During the third quarter of 2021, SRLN returned 0.64% slightly underperforming both the Markit iBoxx USD Liquid Leveraged Loan Index by 19 basis points (bps) and the S&P/LSTA U.S. Leveraged Loan 100 Index by 34 bps on a NAV basis but recovered some performance over the quarter as Covid-19 Delta concerns subsided1,2.
During the third quarter, SRLN slightly underperformed its benchmarks due to its overweight to lower-rated companies and assets in the re-opening trade. Debt of certain movie theaters, airline and travel companies all traded lower in early July on the proliferation of the Covid-19 Delta variant, as well as vaccine hesitancy.
The Fund recovered some performance over the quarter as Covid-19 Delta concerns subsided prompting a rally in those same lower-rated credits. SRLN was also able to realize gains in certain high conviction idiosyncratic credits, including movie theater and airline names, through a reweighting of the portfolio in July, leaving year-to-date (YTD) returns on a NAV basis ahead of its benchmarks.
Top contributors over the quarter were Envision Healthcare, DirecTV, and Team Health. Negative contributors were Altice Financing, Lumileds, and Altice France.*
SRLN received strong inflows in the third quarter, totaling $1.4 billion bringing the YTD total to $5.4 billion as of September 30, 2021.3 The Fund became the largest bank loan ETF, with a market cap totaling $7.7 billion through September 30, 2021.4
*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
The U.S. loan market is recovering from an initial Delta sell-off in early July 2021 to return +0.98% over the quarter, outperforming both investment grade and high-yield indices as well as equities5. Performance was largely driven by a rebound in lower-rated CCC assets and re-opening credits which rallied as Delta concerns eased.
Technicals also supported performance as demand for loans easily soaked up supply, pushing average loan prices closer to par.6 Helped by increased M&A-backed loan supply, total institutional loan volume through the end of September rose to $487 billion, surpassing the prior high for the first three quarters in 2017, and within easy striking distance of the 2017 full-year record of $503 billion.7
Offsetting this was $46.7 billion of new collateralized loan obligation (CLO) issuances priced in the third quarter, the third consecutive period of record quarterly issuance. Issuance rose to $130 billion through the end of September 2021, topping the yearly volume record of $129 billion set in 2018. Retail loan funds contributed another $25.9 billion of net inflows to the market, double the amount posted in the second quarter.8
That same demand, combined with the low duration nature of loans, shielded U.S. loans from broader market volatility in September. The weakness was triggered by the Federal Reserve (the “Fed”) signalling that it would start to pare back its $120 billion bond buying program towards the end of 2021. Meanwhile, expectations for the Fed to start to hike rates in the next two years, prompted an increase in rates with the 10-year Treasury breaching 1.5%.9
We expect credit fundamentals to continue to improve and note that default volumes in the third quarter hit their lowest quarterly level since the fourth quarter of 2013. This year’s default volume is on pace to be the lightest in a calendar year since $4.5 billion defaulted in 2007. The leveraged loan default rate declined further in September to its lowest level since February 2012, and we expect default rates to remain low by historical standards over the near term.10
Portfolio Positioning and Outlook
SRLN remains overweight single-B and CCC rated assets relative to both the S&P/LSTA Leveraged Loan Index and the Markit iBoxx USD Liquid Leveraged Loan Index11. During September we slightly increased the Fund’s exposure to CCC-rated assets up from 14% in August to 17% and we continue to adjust portfolio positioning based on latest market views and developments.
Despite the increase in loan supply during the third quarter and into October, appetite continues unabated skewing technicals in favor of borrowers. There’s still a strong pipeline of CLO warehouses that will need to buy new loan assets, while mutual fund inflows continue apace into October.
As loan prices continue their march towards par and above, there’s a growing risk that borrowers will start to reprice deals amid buoyant demand. For reference, the all-in-spread for single-B rated loans fell 22 bps by early October from their August prices, while the yield to maturity dropped 23 bps to 4.69% in the same period.12
We are mindful of the potential for greater volatility across broader markets caused by mounting headwinds across the globe including rates, tapering, the energy crunch, supply chain issues and labor market shortages, as well as political maneuvering in Washington D.C.
However, we remain constructive on the loan market as a source of income and mitigant against interest rate volatility. Rate hike expectations may generate more inflows into senior loans given their floating rate nature and reduced duration risk compared with fixed-rate debt, particularly if high-yield investors rotate into the loan asset class in search of yield.
On a final note, bank loan ETFs offer an ongoing yield premium to high-yield ETFs, while expectations for the 10-year Treasury yield to move still higher should prove supportive for bank loan relative performance.13
1Performance quoted represents past performance, which is no guarantee of future results. Investment return and principal value will fluctuate, so you may have a gain or loss when shares are sold. Current performance may be higher or lower than that quoted. Visit ssga.com for most recent month-end performance. Performance of an index is not illustrative of any particular investment. It is not possible to invest directly in an index.
2 Primary Benchmark is Markit iBoxx USD Liquid Leveraged Loan Index. Inception date is 06/30/2006. Secondary Benchmark is S&P/LSTA U.S. Leveraged Loan 100 Index. Inception date is 10/20/2008.
3 Bloomberg SRLN Daily Recap, September 1, 2021. AUM is estimated and unaudited.
4 Bloomberg as of September 30, 2021
5 “Investment Grade” defined as the Bloomberg Corporate Bond Index,“High-Yield” defined as the Bloomberg High Yield Index, “Equities” defined as the S&P 500. Performance of an index is not illustrative of any particular investment. It is not possible to invest directly in an index.
6 Source JPMorgan High Yield Bond and Leveraged Loan Market Monitor October 1, 2021
7 LCD Third Quarter Review, 2021
8 LCD, October 5, 2021
9 Credit Suisse Daily Strategy, October 1, 2021
10 J.P. Morgan Default Monitor, October 1, 2021
11 Morningstar Bank Loan Category is not a benchmark or target for the Fund. Indices are unmanaged and investors cannot invest in an index.
12 LCD, October 7, 2021
13 Citi Research, ETF Perspectives, October 11, 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.
The views expressed in this material are the views of Blackstone Capital, LLC through the period ended September 30, 2021 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.
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.