VIEWS: 4 PAGES: 2 POSTED ON: 11/13/2010
ING Senior Loan Group Talking Points October 28, 2010 Prices Firm on Solid Technicals, Positive Earnings Q - How did the bid averages fare this week? Q - What has been the effect on yields? A – Loan bids moved higher on average, following a slight A – On a secondary spread to three year call basis, the yield pull-back last week. The average bid of the S&P/LSTA on the Flow Name Composite increased 2 bps to land at Leveraged Loan Index Flow Name Composite (the L+469. The chart below shows the secondary spread history “Composite”), which tracks the 15 largest loans in the for the Flow Name Composite since the beginning of 2010. S&P/LSTA Leveraged Loan Index (the “Index”), increased 36 bps to 95.89%. The broad Index gained 26 bps to close at 92.57%. Average Three Year Call Secondary Spreads Technical conditions continue to set the tone, with aggregate S&P/LCD Flow Name Composite ¹ inflows and prepayments comfortably absorbing several new January 1, 2010 to October 28, 2010 deals. Market sentiment remained positive in the face of L+650 equity market volatility, buoyed by several positive earnings announcements. On the primary side, heavy oversubscriptions L+600 continue to support strong post-break trading levels, indirectly benefitting secondary loan prices. L+550 The following t Th f ll i h t h the i history two charts show th average bid price hi t L+500 for the Flow Name Composite and the entire Index, respectively, since the beginning of 2010. L+450 L+469 L+400 Average Bid 0 0 0 0 0 0 0 0 0 10 01 01 01 01 01 01 01 01 01 20 S&P/LCD Flow Name Composite 1/1 /2 2/1 /2 3/1 /2 4/1 /2 5/1 /2 6/1 /2 7/1 /2 8/1 /2 9/1 /2 /1/ 10 January 1, 2010 to October 28, 2010 97 96 For the week ended October 22, 2010, the secondary spread 95 yield on the overall Index ended 2 bps lower at L+576. 94 The following chart shows the secondary spread history for 95.89 the Index since the beginning of 2010. 93 [Please note that the Index yield data is only available on a one week 92 lagging basis, thus the data demonstrated below is for the week ending 91 October 22, 2010.] 90 0 10 10 10 10 10 10 10 10 10 01 20 /2 0 /2 0 /2 0 /2 0 /2 0 /2 0 /2 0 20 1/ 1/2 2/1 / 3/1 4/1 5/1 6/1 7 /1 8/1 9/1 /1/ 10 Average Three Year Call Secondary Spreads 2 S&P/LSTA Leveraged Loan Index January 1, 2010 to October 22, 2010 Average Bid S&P/LSTA Leveraged Loan Index L+700 January 1, 2010 to October 28, 2010 93 L+660 92 L+620 91 92.57 L+580 90 L+540 L+576 89 88 L+500 10 10 10 10 10 10 10 10 10 0 /2 0 /2 0 / 20 / 20 / 20 /2 0 / 20 /2 0 / 20 201 87 1/8 2/8 3/8 4/8 5/8 6/8 7/8 8/8 9/8 /8 / 10 10 10 10 10 10 10 10 10 10 10 /2 0 /2 0 /2 0 /2 0 /2 0 /2 0 /2 0 /2 0 /2 0 /1 / 20 1/1 2 /1 3 /1 4/1 5/1 6 /1 7 /1 8/1 9 /1 10 ING Senior Loan Group Talking Points October 28, 2010 Q - Did anything happen to the default rate? Total Loan Fund Assets Under Mangement December 31, 1996 to September 30, 2010 change. A – No change The chart below shows the historical default $50B rates for the Index by both issuer number and principal amount since December 31, 2009. $40B 3 Lagging 12 Month Default Rate S&P/LSTA Leveraged Loan Index $30B December 31, 2009 to October 28, 2010 12% $20B 10% $10B 8% $0B 6% Year- 96 997 998 999 000 001 002 003 004 005 006 007 008 009 p-10 end: 19 1 1 1 2 2 2 2 2 2 2 2 2 2 Se 4% one new exchange-traded fund has been launched. All signs 2% 3.22% point to more activity, with talk of several new funds 2.28% permeating the market. 0% Near-term, absent an unexpected reversal in the path of /09 /09 0 0 0 0 0 0 0 0 0 /10 11 12 1/1 2/1 3/1 4/1 5/1 6/1 7/1 8/1 9/1 10 default rates and/or economic activity, and barring an Defaults by Issuer Number Defaults by Principal Amount unforeseen exogenous event, we expect the loan market will remain attractive to investors seeking attractive risk-adjusted Q - As mentioned in previous editions of Talking Points, yields. Looking out a little further, perhaps the tried and true inflows have rivaled take-outs as the major theme of 2010. driver of strong absolute and relative performance – the What has driven flows and where do you see them going? upward move in interest rates – will come into play. A – Along with refinance/repayment activity, the return of the t il investor h greatly i th retail i t has t d the loan market i tl impacted th l k t in Unless otherwise noted, the source for all data in this report is Standard & Poor’s/LCD. S&P/LCD does not make any representations or warranties as to the completeness, accuracy or sufficiency of the data in this report. 2010. During the nine-month period ended September 30, 1 – Assumes 3 Year Maturity. Three year maturity assumption: (i) all loans pay off at par in 3 years, (ii) discount from par is loan mutual fund assets under management (AUM) grew amortized evenly over the 3 years as additional spread, and (iii) no other principal payments during the 3 years. Discounted spread is calculated based upon the current bid price, not on par. 38%. In fact, the September 30 balance of $45.2 billion (chart 2 – Excludes facilities that are currently in default. 3 – Comprises all loans, including those not tracked in the LSTA/LPC mark-to-market service. Vast majority are institutional next column) already rivals the historical high water mark of tranches. Issuer default rate is calculated as the number of defaults over the last twelve months divided by the number of $46.7 billion set in 2006. From a flow perspective, 2010 is issuers in the Index at the beginning of the twelve-month period. Principal default rate is calculated as the amount defaulted over the last twelve months divided by the amount outstanding at the beginning of the twelve-month period. expected to double that of 2009 ($7.5 billion YTD and $4.7 General Risks for Floating Rate Senior Bank Loans: Floating rate senior bank billion, respectively). loans involve certain risks. Below investment grade assets carry a higher than normal risk that borrowers may default in the timely payment of principal and The attraction to retail investors lies in a combination of loans, interest on their loans which would likely cause the value of the investment to returns and yields that far outstrips other short-duration decrease. Changes in short-term market interest rates will directly affect the yield alternatives, an improving risk profile, and an inherent hedge on investments in floating rate senior bank loans. If such rates fall, the against the eventual move rise in short-term interest rates investment’s yield will also fall. If interest rate spreads on loans decline in general, the yield on such loans will fall and the value of such loans may decrease. When (i.e., participation in rising rates and downside principal short-term market interest rates rise, because of the lag between changes in such protection). With the increase in flows, it’s not surprising to short term rates and the resetting of the floating rates on senior loans, the impact learn that the number of loan funds is growing. In 2010, five of rising rates will be delayed to the extent of such lag. Because of the limited secondary market for floating rate senior bank loans, the ability to sell these loans new open-end products have been introduced. In addition, in a timely fashion and/or at a favorable price may be limited. An increase or decrease in the demand for loans may adversely affect the loans. Contact Information The ING Senior Loan Group is a part of ING Investment Management, the world-wide investment arm of ING Group N.V., with over 700 investment professionals managing nearly $500 billion in assets globally. Our Group is headquartered in Scottsdale, Arizona U.S.A., with an additional office in London, England. We manage senior loans through three U.S. based mutual funds, a Luxembourg based SICAV, a collective trust for U.S. based pension plans, a Group Heads privately offered fund which invests primarily in European loans, and several structured finance vehicles (CLOs). The ING Senior Loan Group is comprised of 26 investment professionals and 18 dedicated support staff. There are four portfolio management teams in Dan Norman Scottsdale, each of which is responsible for particular industries, and a European team that is responsible for European loan management. Our two Group Heads, the chief credit officer and a senior credit officer comprise the Investment Committee, which approves all investment decisions. Finally, the team is Jeff Bakalar supported by a highly qualified trading, operations, analytics and legal team that is dedicated exclusively to this asset class. This commentary has been prepared by ING Investment Management for informational purposes. Nothing contained herein should be construed as (i) an offer 7337 E. Doubletree Ranch Road to sell or solicitation of an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Any opinions expressed herein reflect our judgment and are subject to change. Certain of the statements contained herein are statements of future expectations Scottsdale, AZ 85258 USA and other forward-looking statements that are based on management's current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) interest rate levels, (4) increasing levels of loan defaults (5) changes in laws and regulations and (6) changes in the policies of governments and/or regulatory authorities. The opinions, views and information expressed in this commentary regarding holdings are subject to change without notice. The information provided regarding holdings is not a recommendation to buy or sell any security. Fund holdings are fluid and are subject to daily change based on market conditions and other factors.
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