Revenue from leveraged loan transactions exceeded $900 million in 2023, up 16% from 2021 and 29% from 2022, according to a new report from Coalition Greenwich.
Over the past three years, leveraged loan markets have experienced changes in income, as seen in fixed income markets; However, research shows that the largely floating rate market managed to weather the storm of rising interest rates that drove down bond prices.
The market still experienced volatility and a decline in issuances in 2022, attributed to expectations of a possible recession that did not come true. Despite this, traders saw a rebound in 2023.
Expectations for leveraged loan trading volumes are divided, with more than 43% of investors expecting revenue to continue rising, and hedge funds expressing more optimistic sentiment, according to the Coalition Greenwich report.
A smaller portion (21%) of respondents, primarily asset managers, predict a decline in revenue, and the divergence could be related to different investment strategies and risk appetite among these investor segments.
Regarding strengthening dealer relationships, Coalition Greenwich found that the number of dealer relationships maintained by investors was 10.2, a fraction of the 10.7 in 2022.
The trend could suggest a consolidation in counterparty selection, attributed to an increased focus on building deeper relationships with a core set of trusted traders.
Quality of execution was the key priority when choosing a dealer counterparty, and 48% of buy-side leveraged loan trading volume was allocated to dealers based on quality of execution.
More than a quarter of the volume (27%) was linked to new issuance capacity and allocations, reflecting competition for new loan offerings, where this can be critical to generating alpha.
The report also noted a decline in agent dominance, with a slight reduction in trading activity with the agent bank for leveraged loans (totalling 67%, down 2% from 2022).
Coalition Greenwich noted that this suggests a potential diversification of trading counterparties, driven by the search for best execution across a broader group of traders.
While quality of execution remains paramount, access to new issues and efficient trading are crucial considerations. The data also suggests a possible shift toward a more transactional and performance-oriented approach, with investors placing greater emphasis on the demonstrable value of their distributor counterparties.
As the market landscape continues to evolve and technology becomes a more important part of the ecosystem, understanding these changing investor priorities will be critical for distributors looking to maintain and strengthen their positions.