Leveraged Loans Suffered Biggest Monthly Decline in Seven Years

(Bloomberg) -- U.S. leveraged loans suffered their biggest loss in December since mid-2011, following record-breaking fund outflows. Despite this, the floating-rate asset class eked out a slim gain for 2018.

Loans posted a 2.5 percent loss in December, the worst since August 2011, when S&P downgraded the U.S. AAA credit rating and loans lost 4.4 percent in the month. This followed a 0.9 percent drop in November and compared to a 2.1 percent loss for U.S. junk bonds last month, data compiled by Bloomberg show.

Still, loans held onto a rare gain in U.S. credit markets, rising 0.44 percent as high-yield bonds lost 2.1 percent and investment-grade bonds fell 2.5 percent for the year. They also beat U.S. equities.

Last year’s return was the third worst for the S&P/LSTA Leveraged Loan Index in 20 years. Loans have had only two down years this century -- once during the financial crisis in 2008 when losses ballooned to negative 29 percent, and again in 2015 when collapsing energy prices sent returns to negative 0.69 percent.

There wasn’t a single trading session of gains since Nov. 1 save for the very last day of the year, as mutual funds sold to meet redemptions and new CLO activity slowed due to heightened volatility. The average price for loans hit the lowest in more than two years before inching up to 93.84 on Dec. 31.

This year could be better for leveraged loans, if history is any guide. Returns following down years were the best in the index history, which goes back to 1997 and Wall Street prognosticators expect gains of as much as 6 percent in 2019.

To contact the reporter on this story: Lisa Lee in New York at llee299@bloomberg.net

To contact the editors responsible for this story: James Crombie at jcrombie8@bloomberg.net, Kelsey Butler

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