Bank Debt Returns

A reader was asking me about bank debt returns. I just received a message from one of my dealers:

The Leveraged Loan Index:

1992: +6.75%
1993: +11.17%
1994: +10.32%
1995: +8.91%
1996: +7.48%
1997: +8.30%
1998: +5.31%
1999: +4.69%
2000: +4.94%
2001: +2.65%
2002: +1.12%
2003: +11.01%
2004: +5.60%
2005: +5.69%
2006: +7.33%
2007: +1.88%
2008: -28.75%
YTD (as of April 8th): +9.61%

Please keep in mind, these are unlevered returns.

Now, the composition of leveraged loan buyers is substantially different than it was in 1992-2000 - i.e. the rampant presence of CLOs. Some reports indicate that CLOs represent 60% of the bank debt market right now. And CLOs are under some pressure as evidenced by this Moody's article. A reason the leveraged loan market was down so much last year was the unwinding of market value CLOs.

One of the things investors are seeing in the bank debt market right now is the "CLO Effect" - in short, a CLO does not like to buy assets below a price of 80 (85 in some deals) because they then have to market the asset to market for a number of their tests (CLOs are subject to a varity of tests including weight average spread tests, the amount of Triple-C assets they can hold, etc). If the CLO buys the asset above 80, you can mark it at par, and all is fine and dandy. So what you are seeing in the market, is deals getting a boost when they begin trading over 80. Does this make an economic sense? No. Is it something to consider? Absolutely. Is this what we are seeing now? Maybe.