Frank Ossino, sector head of the bank loan asset class at Newfleet Asset Management, discusses the opportunities and areas of concern for bank loans as we enter 2020.
2019 Review – On the back of still supportive, albeit decelerating, macroeconomic conditions and a pivot toward a lower interest rate regime in the U.S., 2019 was a good year for risk assets and fixed income in general, especially long duration markets. Despite a declining rate environment, the loan market will close 2019 up nearly 8%, driven largely by coupon. The year began with a rally post the December 2018 sell-off. Three Federal Reserve interest rate cuts led to over $30 billion in retail mutual fund outflows. The continued trade issues with China provided near-daily volatility (up and down), and credit-specific earnings/news resulted in sharp moves in price on a number of credits driven by the heightened focus on lower-tier credits and the impact of credit agency downgrades as it relates to collateralized loan obligation (CLO) portfolios.
Opportunity – We remain constructive on the asset class, but recognize that credit selection will be the path to outperformance. Going into 2020, financial markets appear to be less concerned about recession compared to this time in late 2018. With the data pointing to continued low inflation, central bank accommodation, and GDP growth in the 2% area, the year could extend the long post-crisis recovery and set up nicely for risk assets, including loans. Coupled with a very manageable maturity wall and strong interest coverage metrics, we remain positive but with reservations. U.S./China trade issues are not yet resolved, and credit conditions have deteriorated somewhat as evidenced by an uptick in loans trading below 80 cents on the dollar and a spike in credit agency downgrades that have increased the size of the B- and CCC rating cohorts.