Outlook 2013: Secondary market performance unclear as 2012 strength hard to beat

By Sara Rosenberg

New York, Dec. 31 - The secondary loan market saw a solid year in 2012, and because of that market participants disagree on the direction of the market in 2013, with some expecting it to be flat, others thinking that there might be a slight uptick and yet others predicting a retreat.

"Since we're already at par, there's not much room for prices to improve. Spreads tightening will mean refinancings to some extent. We may get closer to 101 on the bid side if demand gets high enough, but generally I think it's a coupon clipping sideways market unless things go down," a buyside source explained.

"Not a whole lot [of] improvement to be captured from where we are now. Macro risks notwithstanding, no reason to think we should see deterioration in those levels," a market professional added.

A sellside source, meanwhile, predicted that trading levels will rise because of a lack of supply of paper and continued demand.

"Loan book traded up. All par traders made money but they are out of inventory. We should see continued improvement throughout the year as spreads tighten a bit. May be a hiccup due to fiscal cliff but over 12 months, loan prices should rise," the sellside source remarked.

And, on the other side of the fence, a different sellside source said that secondary levels are going down in 2013 because they are currently at all-time highs with "no room to go higher."

2012 sees great returns

According to Markit, the secondary market in 2012 was remarkably strong, with total returns for the Markit iBoxx USD Leveraged Loans index seen at 9.53% by mid-December and the Markit iBoxx USD Liquid Leveraged Loans index up 10.18% by mid-December.

By comparison, in 2011, the Markit iBoxx USD Leveraged Loans index returned 0.90% and the Markit iBoxx USD Liquid Leveraged Loans index lost 0.05%.

Also, average bids for U.S. loans were 95.58 on Dec. 17 versus 91.28 on Jan. 1, 2012.

"The market has enjoyed about double the historical return and low volatility for loans in 2012. A combination of high relative yields, the steady, if unremarkable, economy, and low rates of default drove fairly steady increases in return, particularly in the second half of the year," said Otis Casey, director and loan market analyst at Markit.

"Looking forward, investors could again expect solid performance from loans, especially since the Fed has not signaled it is ready to reverse its policy on rates," Casey added.

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