Leveraged loan trading revenue topped $900 million in 2023, up 16% from 2021 and 29% from 2022, a new report from Coalition Greenwich has found.
Over the past three years, leveraged loan markets have experienced shifting revenues as seen throughout fixed income markets, however, research shows that the mostly floating rate market managed to weather the storm from rising interest rates which drove down bond prices.
The market still experienced volatility and a decline in issuance in 2022, attributed to expectations of a possible recession which did not actualise. Despite this, dealers saw a rebound in 2023.
Expectations for leveraged loan trading volumes are divided, with more than 43% of investors expecting revenues to continue to rise, with hedge funds expressing a more bullish sentiment, according to the Coalition Greenwich report.
A smaller portion (21%) of respondents, mainly asset managers, predict a decrease in revenues – with the divergence potentially being linked to varying investment strategies and risk appetites among these investor segments.
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With respect to consolidation in dealer relationship, Coalition Greenwich found that the amount of dealer relationships maintained by investors was 10.2, down fractionally from 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 dealers.
Execution quality was the key priority when choosing a dealer counterparty, with 48% of buy-side leveraged loan trading volume allocated to dealers based on the execution quality.
Over a quarter of volume (27%) was linked to new issuance capabilities and allocations, reflecting competition for new loan offerings, where this can be critical for generating alpha.
The report also noted a wane in agent dominance, with a slight reduction in trading activity with the agent bank for leveraged loans (totalling 67%, down by 2% compared to 2022).
Coalition Greenwich noted that this suggests a potential diversification of trading counterparties, driven by the pursuit of best execution across a wider pool of dealers.
“While execution quality remains paramount, access to new issues and efficient trading are crucial considerations. The data also suggests a potential shift toward a more transactional and performance-driven approach, with investors placing greater emphasis on demonstrable value from their dealer counterparties.
“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.”