Loans rebound in 2009, but outlook remains uncertain


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By Colm Doherty

After a difficult 2008 during which loan returns hit never before seen lows, the market has regained some lost ground. Year to date through April 15, loans have returned 15.5%, according to the S&P/LSTA Leveraged Loan Index. While not enough to make up for last year’s fall, it has helped investors to recoup some of the losses suffered last year. Alternatively, it’s a nice return for those who may have timed the market well and bought in the secondary earlier this year. Fig. 1

Fig. 1: YTD returns by asset class

One notable aspect of market performance this year is that loan returns are outpacing that of other asset classes. The 15.5% return for leveraged loans easily exceeds that of cash pay high yield bonds (11.4%), high-grade corporate bonds (0.38%) and equities (-3%) (Fig. 1). Traditionally not an asset class associated with outsized returns, the dismal performance of the loan market last year has translated into far more room for upside gain compared to that seen in the past.

Fig. 2: Quarterly leveraged loan returns

Loans returned 9.8% in 1Q09 specifically, their best quarterly performance ever (though it’s still overshadowed by the 23% loss of 4Q08) (Fig. 2).