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Leveraged loan returns: Loans lose 0.04% today; YTD return is 1.06%

Loans lost 0.04% today after gaining 0.01% yesterday, according to the LCD Daily Loan Index.

The S&P/LSTA US Leveraged Loan 100, which tracks the 100 largest loans in the broader Index, lost 0.13% today.

In the year to date, loans overall have gained 1.06%.

A full xls of the Daily Index is available for LCD subscribers. 

LCD Daily Loan Index – January 31, 2013

TOTAL RETURNS

All

Perf. Loans

L100

BB

B

CCC

For 1/31/13     -0.04%    -0.05%     -0.13%

 -0.03%

-0.02%

   -0.39%

For 1/30/13      0.01%     0.02%      0.00%

 0.01%

0.02%

   -0.02%

           
Month-To-Date 1/31/13

1.06%

     1.13%

1.21%

0.77%

1.40%

   1.15%

12/31/12 – 1/31/13

1.06%

    1.13%

1.21%

0.77%

1.40%

1.15%

12/31/11 – 1/31/12

2.18%

    2.19%

2.88%

1.54%

2.78%

   2.56%

Source: S&P/LSTA Leveraged Loan Index.

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Loan mutual funds see second-largest weekly cash inflow on record

Data from EPFR Global show an $883 million cash inflow to U.S. bank loan mutual funds and ETFs in the week ended Jan. 30, by weekly reporters only. That figure includes a $57 million inflow into ETFs, representing about 6% of the weekly total.

This is the second largest loan inflow on record, trailing only $884 million in the week ending Jan. 19, 2011. It is keeping with the significant inflows over the past several weeks, including $656 million last week and $736 million in the week prior. With that, the four-week trailing average rises to $714 million, from $559 million.

The inflow streak has now been extended to 23 weeks for a total inflow over that span of $8.9 billion. Total inflow for the year-to-date is $3.1 billion, with ETFs contributing $310 million, or 10% of the total. For reference, there were $98 million of outflows over the comparable period a year ago.

Total assets of the weekly reporter sample were $53.5 billion at the end of the latest observation period, up from $52.7 billion in the prior reading. After stripping out the inflow, that’s about a 1.7% gain, or an increase of about $891 million.

The total inflow for 2012 was $7.77 billion, with positive readings recorded in 42 of the 52 weeks with a weekly average for the year of $149 million. Roughly $1.2 billion, or about 16% of that figure, is tied to ETF inflows (there are now two funds in the sample: the BKLN PowerShares Senior Loan Portfolio and Pyxis iBoxx Senior Loan ETF, the only ETF tracking the Markit iBoxx USD Liquid Leverage Loan Index).

By contrast, there were $6.3 billion of inflows to loan funds in 2011 and $9.4 billion of inflows to loan funds in 2010. Neither includes data tied to the ETF segment. – Jon Hemingway

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GSC Group Ch. 11 battles continue; Black Diamond attacks Capstone

Kaye Scholer and Capstone Advisory Group were wrong to identify well-known restructuring advisor Robert Manzo as an “employee” of Capstone rather than as an independent contractor, but that mistake should not force them to disgorge nearly $16 million in fees earned working on the Chapter 11 of former distressed-debt hedge fund GSC Group, they say.

“Mistakes were made,” Kaye Scholer partner Aaron Rubinstein wrote in a Jan. 28 response to motions filed by the U.S. Attorney in the case and Black Diamond Capital Management, which bought GSC’s assets last year in a Section 363 sale. “The disclosures in connection with the Capstone retention application and the Kaye Scholer retention application were not adequate…But any errors attributable to Kaye Scholer were not intentional.”

“The firm regrets these mistakes and the burden it has placed on the Court, the U.S. Trustee’s office, and the other parties,” Rubinstein continued. “Nonetheless, the severe sanctions sought against the firm are not warranted,” he said.

Rancorous process

GSC filed for Chapter 11 protection in Manhattan in August 2010, its portfolio deflated by the economic collapse of 2008. It was a particularly rancorous bankruptcy process, replete with name-calling and defamation suits, but the court ultimately approved a reorganization plan submitted by Black Diamond, the GSC creditor that won a Section 363 auction for GSC’s assets in July 2011, with an offer of about $235.7 million. GSC officially emerged from Chapter 11 on March 16 – Black Diamond took over a number of the firm’s investments, and the typical clean-up work left at the end of a large Chapter 11 was handed to a liquidating trustee, Robert Manzo.

Yet the case drags on. In early January, following a discovery made reviewing newly uncovered documents, the U.S. Trustee filed a motion seeking to eliminate and disgorge any fees paid to Kaye Scholer or Capstone, GSC’s financial advisor, alleging that they violated bankruptcy laws when they purposely failed to disclose that Capstone executive director Robert Manzo was, in fact, an independent contractor working via a fee-sharing agreement with the firm. The disclosure rules are designed to guard against fee inflation in Chapter 11 proceedings.

Black Diamond filed a joinder to the US Trustee’s motion, arguing that Capstone should never have sought its $3.25 million “success fee” related to the GSC case and that Manzo, through his limited liability company RJM1, should never have been appointed as trustee of GSC’s liquidating trust “due to irreconcilable conflicts of interest and breaches of trust.”

Together, Capstone and Manzo are seeking nearly $10 million in fees related to their work on the case, $5.65 million of which would go to Manzo alone, court records show.

The fog of restructuring

Kaye Scholer partner Michael Solow, who led the firm’s work for GSC, claimed not to have known of Capstone’s arrangement with Manzo at the time the GSC bankruptcy was filed, even though he personally advised Manzo on the contract when he started with Capstone in 2006, “as a favor.” Manzo and Solow are friends; they go on golfing trips together. But four years later, he says, he did not remember the specifics of that contract or even advising Manzo in the first place.

What’s more, the retention applications that mistakenly identify Manzo as an employee were drafted by other, lower-level lawyers at Kaye Scholer, who did not know of the contract. Solow, who at the time had an hourly billing rate of $1,050, was too expensive to deal with such routine motions, Kaye Scholer argues. That fell to partner D. Tyler Nurnberg ($700 per hour) and senior lawyer Matthew Micheli ($685 per hour), who oversaw day-to-day management of the case.

In his own response to the disgorgement motions, Manzo said that, “like any other highly experienced person working at a very senior level on a complicated bankruptcy matter,” his compensation would be “substantial.”

“There is no allegation – nor could there be – that Mr. Manzo himself was working for free,” his lawyers noted in their list of “undisputed facts” on the matter.

The U.S. Trustee and Black Diamond have fabricated a conspiracy among members of “a prestigious law firm – Kaye Scholer – Mr. Manzo, senior people at Capstone, and a number of other professionals, allegedly hatched and carried out in a supposed attempt to secure fees that would otherwise be unavailable to these professionals, all of whom have unblemished records and significant histories in major bankruptcy proceedings over the last three decades.”

You say potato…

Manzo, too, apologized for the inaccurate use of the word “employee,” but it was an error that in no way affected the work that he or Capstone did for GSC, he said. Capstone claimed in its defense motion that the firm in fact charged the estate less for Manzo’s services than Capstone paid to Manzo.

Capstone went on to attack the entire legal basis for the disgorgement motion, and to excoriate the Trustee for introducing details of Manzo’s intertwined personal and professional relationship with Solow, which it says are irrelevant – including the time Manzo filed a $20,000 expense report with Capstone to pay for a golfing trip to South Carolina via private jet, on Solow’s 50th birthday.

“Despite marshaling a seemingly endless stream of minutiae relating to all aspects of the Capstone-Manzo relationship, the [U.S. Trustee’s] motion does not discuss, other than in a single passing sentence, the only relevant question: was Mr. Manzo covered by Section 504(b)(1) of the Bankruptcy Code, which permits the sharing of fees among certain persons? The motion uses the phrase ‘fee sharing’ or its variations numerous times, without acknowledging that, in fact, fees can be and are routinely shared among parties that fit within the Section 504(b)(1) exception. Neither the language, the purpose, nor the interpretive history of Section 504 supports the Movants’ arguments.”

Capstone likened the situation to a law firm, which, for example, is not required to specify whether its retained lawyers are listed as a “partner,” an “equity partner,” or even a “contract partner.”

Not a trustworthy individual

Capstone also expressed surprise that the U.S. Trustee would pursue such a motion in this case, although it noted that Black Diamond’s motion is understandable given the bad blood between the firms. Black Diamond “resents Capstone’s efforts in the case, which resulted in Black Diamond paying $230 million more for [GSC’s] assets than it originally intended.” Capstone goes on to quote testimony from Black Diamond co-founder Stephen Deckoff, who, based on his dealings with Manzo in this case, called him “an absolute liar,” who is “not a trustworthy individual.”

The fee battle is just the latest in a long line of disputes over GSC’s demise. Last May, Manzo – in his capacity as liquidating trustee – filed a motion regarding a tax dispute in which he claimed that “Black Diamond has a history in these cases of having acted to remove professionals that resist its self-interested schemes.” (See, “Ernst & Young accused of conflict in GSC Group bankruptcy,” LCD News, May 24, 2012).

A hearing on the matter is scheduled for Feb. 11, before U.S. Bankruptcy Judge Shelley Chapman, in Manhattan. – John Bringardner

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Chart: Leveraged loan activity surges as issuer-friendly deals rule

leveraged loan volume

The rolling 30-day average of leveraged loans launched to the institutional investor market soared this week, topping $45 billion, as issuers continued to take advantage of buyside demand and private equity sponsors lined up to refinance existing debt. Indeed, many of the high profile credits launched over the past 7 days were courtesy sponsors, including Freescale Semiconductor ($2.73B/Blackstone), Berry Plastics ($1B/Apollo), and communications concern WideOpenWest ($1.9B/Avista).

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HG bonds, chart, analysis: short-term business debt expands steadily in January in steady 2 year rise

While reports this week of a small fourth-quarter contraction in U.S. GDP sent shivers through the markets, U.S. businesses are so far signaling no change of heart in terms of tolerance for short-term debt leverage, Fed data show.

On a seasonally adjusted basis, the Federal Reserve reported $173 billion of outstanding U.S. domestic nonfinancial commercial paper as of Wednesday, up more than $13 billion on the strength of consecutive weekly increases since Jan. 2, while testing the highest levels dating to early 2002.

The measure, which is generally associated with business-activity trends including inventory investment and production, bottomed out at $65 billion at the height of the recession in the summer of 2009.

Steady increases in nonfinancial CP balances come despite a high volume of long-term debt issued in recent months to refinance short-term debt balances. Since long-term Treasury rates reached record lows last July, issuers explicitly cited the refinancing of existing debt as the primary use of proceeds in more than $186 billion of new long-term debt deals, versus $109 billion of such refi-driven deals over the first half of 2012, LCD data show. General Mills this week placed its first deal since early 2011, a $1 billion, three-part offering targeting the repayment commercial-paper borrowings.

The steady increase in CP balances also backstops the nearly uninterrupted two-year rise in the sum of nonfinancial CP plus U.S. commercial and industrial loans, or what is frequently cited by ratings agencies as a broader proxy of short-term leverage tolerance across U.S. businesses. That sum this month reached $1.7 trillion for the first time since the immediate aftermath of the Lehman Brothers collapse, when the measure reached an all-time peak of $1.78 trillion in the fourth quarter of 2008, to a post-crisis low of $1.3 trillion in January 2011. – John Atkins

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Freescale on deck for today with $2.73B term loan refinancing

Citigroup, J.P. Morgan, Deutsche Bank and Credit Suisse have scheduled a conference call for 1:30 p.m. EST today to launch a $2.73 billion, seven-year covenant-lite term loan for Freescale Semiconductor, according to sources.

Proceeds from the loan will be used to refinance the company’s $2.22 billion extended term loan due 2016 and its $492 million incremental term loan due 2019, which is priced at L+475, with a 1.25% LIBOR floor.

The company last tapped the loan market in February 2012 for a $500 million incremental loan, proceeds of which were used to redeem a portion of the chip-maker’s 10.125% subordinated notes due 2016. The incremental loan is covered by a 101 soft call premium that rolls off in late February.

Austin, Texas-based Freescale makes embedded semiconductors for the automotive, consumer, industrial, and networking markets. Corporate ratings are B/B2. – Kerry Kantin

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Apollo, Metropoulos in deal for Hostess snack business for $410M

hostess logoHostess Brands said affiliates of Apollo Global Management and Metropoulos & Co. would act as stalking-horse bidders for the majority of Hostess’ snack-cake business under a $410 million asset-purchase agreement.

The deal, announced last night, brings the combined total of stalking-horse bids for Hostess’ assets to $850 million. The others are Flowers Foods’ stalking-horse agreement to purchase most of Hostess’ bread assets for up to $390 million, along with two smaller deals announced earlier this week, one for the Drake’s business and another for additional bread assets focused on the Northwest U.S., for $27.5 million and $28.85 million, respectively.

But each of those deals is subject to higher and better offers via an auction process in the White Plains, N.Y., bankruptcy court. The auction related to the Flowers Foods deal for the bread business assets is set for Feb. 28, and according to court documents the company is seeking an auction related to the Drake’s and the Northwest bread brands sales for March 15.

The company said it was asking the bankruptcy court in White Plains, N.Y., to schedule an auction for the snack-cakes business for March 13, while Apollo and Metropoulos said they expected a transaction to close prior to the end of April.

The sale of the snack-cakes business, which includes some of Hostess’ most iconic brands, such as Twinkies, Dolly Madison, Ho Hos, Zingers, and Suzy Q’, includes five bakeries and “certain equipment.”

The bid was expected, as Apollo and Metropoulos have been the rumored stalking-horse bidders for the snack-cakes business for weeks.

In a news release last night, Hostess CEO Greg Rayburn noted, “Interest in these iconic brands has been intense and competitive and we expect that to continue through a robust, court-authorized auction process.” Appearing this morning on CNBC’s Squawk Box, Rayburn said that he expected the “auction on the cake side – the Twinkie side – to be wild and wooly.”

Rayburn also said on the show that the company had about $100 million of assets left to sell, and suggested that the company could end up paying lenders 100 cents on the dollar. – Alan Zimmerman

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Leveraged loan returns: Loans gain 0.01%; YTD return is 1.11%

Loans gained 0.01% today after losing 0.01% yesterday, according to the LCD Daily Loan Index.

The S&P/LSTA US Leveraged Loan 100, which tracks the 100 largest loans in the broader Index, remained unchanged today.

In the year to date, loans overall have gained 1.11%.

LCD Daily Loan Index – January 30, 2013

TOTAL RETURNS

All

Perf. Loans

L100

BB

B

CCC

For 1/30/13

      0.01%

     0.02%

      0.00%

 0.01%

0.02%

    -0.02%

For 1/29/13

     -0.01%

    -0.01%

     -0.02%

-0.01%

0.00%

   -0.03%

 

 

 

 

 

 

 

Month-To-Date 1/30/13

1.11%

     1.18%

1.34%

0.81%

1.42%

   1.55%

12/31/12 – 1/30/13

1.11%

     1.18%

1.34%

0.81%

1.42%

1.55%

12/31/11 – 1/30/12

2.07%

     2.06%

2.72%

1.48%

2.65%

   1.98%

Source: S&P/LSTA Leveraged Loan Index

 

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LBO activity jumps in January; market pros eye busier 2013 for buyouts

Lost amid the flood of capital into the leveraged finance market – which has pushed clearing levels for both loans and high-yield bonds dramatically lower - is the fact that LBO activity picked up in January.

In all, private equity firms have inked $11.3 billion of new transactions during the month, up from $6.9 billion in December. Likewise, LBO-related loan volume has reached $7 billion month-to-date, up from $3.8 billion in December.

The quick start to 2013 for LBOs – not to mention talk of huge deals, such as Dell – has market players increasingly optimistic that LBO activity will trend higher in the months ahead, making 2013 a more fruitful year for deal-making than 2012, when LBO volume sagged to $98 billion, from $111 billion in 2011.

This analysis is taken from an LCD News story, LBO activity jumps in January, potentially auguring fruitful year, available to subscribers. It details

  • Number of ‘jumbo’ LBOs
  • Annual LBO volume
  • Yield to maturity of leveraged loans
  • Cost of funds for LBOs
  • Average LBO leverage
  • Debt/EBITDA for highest-leveraged LBOs
  • Average equity contribution, LBOs

 

That story also includes an awesome spreadsheet detailing market stats/tone re LBO deals since 2001 (spoiler: 2009 was “ice-cold”).

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KKR’s First Data launches drive-by leveraged loan to pay off 2014 credit

Credit Suisse and KKR Capital Markets have launched a $258 million drive-by fungible tack-on to First Data‘s term loan due September 2018.

Proceeds will be used to repay B/B3 FDC’s 2014 term loan, sources said.

The issuer is also tapping the bond market via a Citi-led underwriter group with proceeds earmarked to repay notes, sources said.

The loan is offered at 99.75 and commitments are due later today, sources said. – Chris Donnelly