US dealer revenue hit US$900 million in 2023, representing a 16% increase against 2021 and a 29% bump on 2022, attributed to a renewed interest in leveraged loans thanks to interest rate volatility.
The figures are drawn from a new study from Coalition Greenwich, US Leveraged Loan Investors: Volume Expectations and Dealer Relationships, which tracked dealer leveraged loan trading volumes and analysed buy-side expectations for future activity levels. The findings suggest execution quality remains top-of-the-list. However, access to new issues and efficient trading are still crucial considerations for dealers. The data also highlighted a potential shift toward a more transactional and performance-driven approach, with investors placing greater emphasis on demonstrable value from their dealer counterparties.
Kevin McPartland, head of research at Coalition Greenwich market structure and technology, told The DESK, “The interest rate volatility of the past few years has put leveraged loans into the spotlight. The market is ripe for technology innovation, and we see a growing focus on this opportunity by tech providers and market participants alike.”
The research analysed interviews with 59 loan investors – primarily hedge funds and asset managers – based in the US and conducted between March and November 2023, with a focus on the factors driving business to dealer counterparties, trading volume expectations, and evolving relationship dynamics in the leveraged loan market.
The study showed that the average investor maintains approximately 10.2 meaningful dealer relationships, reflecting a slight decrease from 10.7 in 2022, with hedge funds maintaining a marginally higher average number of relationships compared to asset managers.
Thanks to wider market volatility, the fixed income market has seen interest rates rise and bond prices drop. Despite the aforementioned bump in 2023, the study found expectations for future leveraged loan trading volumes are divided. More than 43% of research participants anticipate an increase in volume, with hedge funds more bullish. Conversely, 21%, primarily asset managers, foresee a decrease. The study attributes the divergence to differing investment strategies and risk appetites between these investor groups.
In the competition among dealers for loan trading volume, the study found nearly half (48%) of buy-side leveraged loan trading volume is allocated to dealers based on the execution quality they provide. New issue capabilities and allocations emerge as the second most influential factor, with 27% of volume earned via these factors, reflecting the ongoing competition for new loan offerings.
Sales coverage and relationship management hold less weight compared to execution and new issue access with only 17% of volume earned this way, suggesting a shift toward prioritising transactional efficiency and deal flow. Notably, research holds minimal influence, driving only 5% of volume, the study found.
“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,” McPartland said.
“But the market still experienced volatility and a decline in issuance in 2022 as it grappled with expectations of a recession that never was.”
“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,” McPartland added.
©Markets Media Europe 2024
