By the Numbers

Chasing the leveraged loan index in a bullish market

| July 9, 2021

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

More than a third of CLO loan portfolios outperformed the leveraged loan market from April through June. The average CLO leveraged loan portfolio gained 1.27% and, after adjusting for broad market exposure, or beta, fell behind the market by 3 bp. In a trend that has run since March 2020, managers that held riskier loans tended to outperform, although the magnitude of outperformance has begun to decline.

Loan returns increased steadily between April and June, and the S&P/LSTA Leveraged Loan Total Return Index now exceeds its pre-pandemic level by nearly 6%. After accounting for the various reporting dates of managers, the index gained 1.27% between April and June. Managers held portfolios with an average beta of 1.03, which meant the average manager should have gained 1.31%. With the actual average performance at 1.28%, the average manager trailed the index by 0.03%.

Exhibit 1: Loan returns have moved higher for 16 consecutive months

Source: Bloomberg, Amherst Pierpont Securities

About 38% of the managers led the index, in line with the figures reported by Amherst Pierpont last month (Exhibit 2). Out of the 69 managers with five or more active deals tracked for April through June, 64 managers saw their returns within 25 bp of the index. Five managers delivered alpha greater than 25 bp, with Canyon Capital Advisors generating an alpha of 1.25%. The latest deal from Canyon Capital Advisors, recently reset, outperformed the index by 5.9% in the last three months.

Exhibit 2: Around 38% of managers beat the index between April and June

Note: data shows excess return only for active deals.
Source: Amherst Pierpont Securities.

Exposure to riskier loans again correlated the strongest with excess returns. More exposure to ‘Caa1’ loans and a higher portfolio weighted average rating factor tended to come along with more recent excess returns (Exhibit 3). Weighted average spread, bid depth, and diversity score bore little relation to recent outperformance.

Exhibit 3: Correlation of portfolio or manager features with recent excess return

Note: data shows the correlation of manager or loan portfolio attribute with managers’ excess return or alpha from April through June only on active deals. Portfolio attributes measured as percentiles.
Source: Amherst Pierpont Securities.

In a sustained loan rally over the last year, riskier loans have predominantly helped managers deliver alpha. That trend seems now limited to the lowest-rated loans over the last three months, exemplified by ‘Caa1’ loans. A potential reason for this is that price appreciation of loans may have reached a plateau. More than a quarter of leveraged loans traded at a premium between April and June, according to LCD.

The following managers delivered positive alpha in the market between April and June (Exhibit 4). Canyon, Symphony, and Guggenheim top the chart this time. The other Top 10 alpha leaders include KKR, ZAIS, Ares, Credit Suisse, Bain, Anchorage and Assured.

Exhibit 4: Alpha leaders in CLO portfolio performance April – June 2021

Note: Performance for managers with five or more deals tracked by APS. Performance attribution starts with calculated total return on the leveraged loan portfolio held in each CLO for the 3-month reporting period ending on the indicated date. CLOs, even with a single manager platform, may vary in reporting period. The analysis matches performance in each period to performance over the identical period in the S&P/LSTA Leveraged Loan Index. Where a deal has at least 18 months of performance history since pricing and no apparent errors in cash flow data, the analysis calculates a deal beta. The deal beta is multiplied by the index return to predict deal return attributable to broad market performance. Where no beta can be calculated, the analysis uses the average beta across each manager’s active deals weighted by the average deal principal balance over time. Any difference between performance attributable to beta and actual performance is attributed to manager alpha. Source: Amherst Pierpont Securities.

Jinzhao Wang
jwang@apsec.com
jzwang

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