March 26, 2024 — After a notable drop in leveraged loan revenue in 2022, dealers saw a rebound in 2023 with U.S. revenue topping $900 million. That total represents a 16% increase from 2021 and a 29% jump from 2022, according to a new study from Coalition Greenwich.
Over the past three years, leveraged loan markets have been on the same roller coaster as the rest of the fixed-income market.
“The mostly floating-rate market in leveraged loans was a port in the storm for investors as interest rates rose and drove down bond prices,” says Kevin McPartland, Head of Research at Coalition Greenwich Market Structure & Technology and coauthor of U.S. Leveraged Loan Investors: Volume Expectations and Dealer Relationships. “But the market still experienced volatility and a decline in issuance in 2022 as it grappled with expectations of a recession that never was.”
Expectations for future leveraged loan trading volumes are divided. Over 43% of research participants anticipate an increase in volume, with hedge funds expressing a more bullish sentiment. Conversely, 21%, primarily asset managers, foresee a decrease. This divergence could be attributed to differing investment strategies and risk appetites between these investor groups.
Execution Quality Drives Competition for Trades
In the competition among dealers for loan trading volume, execution quality is paramount. Nearly half (48%) of buy-side leveraged loan trading volume is allocated to dealers based on the execution quality they provide. While execution quality dominates, access to new issues and efficient trading have become crucial considerations.
“As the market landscape continues to evolve and technology becomes a bigger part of the ecosystem, understanding these evolving investor priorities will be critical for dealers seeking to maintain and strengthen their positions,” says Kevin McPartland.
U.S. Leveraged Loan Investors: Volume Expectations and Dealer Relationships tracks dealer leveraged loan trading volumes and analyzes buy-side expectations for future activity levels.