2016 was the Chinese Year of the Monkey. We’re not sure what this meant, or how it applied to the middle market, but in looking at how loans spreads behaved throughout the year, there might have been some relationship.
For one thing, all-in spreads swung around wildly month to month. February, according to LPC, was the highpoint, with almost a 8% yield. The lowpoint arrived only three months later, in May (5.6%).
We’re familiar enough with the non-correlated nature of middle market loans to know their prices don’t rhyme exactly with those of liquid loans. But they do resonate. As fund flows and CLO formation create volatility in the broadly syndicated markets, mid-cap spreads will move in concert with their larger cousins to maintain the same relative illiquidity premium.
That was indeed the case for 2016 middle market first-lien spreads, which averaged around 6.6%. That was slightly better than 2015’s performance of 6.5%, and about 125 bps higher than all-in yields for broadly syndicated loans at the end of the year.
Looking a bit closer at the distinction between traditional middle market loan spreads and those of larger loans, we observe they’ve traded back and forth over the past four quarters (see Chart of the Week). The year ended with smaller, probably clubbier, loans up close to L+500 while larger mostly syndicated ones contracted to L+450.