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Leveraged loan returns: Loans lose 0.05% today; YTD return is 2.91%

Loans lost 0.05% today after losing 0.06% 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 0.07% today.

In the year to date, loans overall have gained 2.91%.

A full xls of the Daily Index is available for subscribers, please click here.

LCD Daily Loan Index – May 31, 2013

TOTAL RETURNS

All

Perf. Loans

L100

BB

B

CCC

For 5/31/13      -0.05%      -0.05%       -0.07%

  -0.04%

  -0.05%

   -0.12%

For 5/30/13      -0.06%      -0.07%      -0.08%

  -0.06%

 -0.07%

   -0.08%

           
Month-To-Date 5/31/13

 0.19%

     0.14%

  0.12%

 0.07%

0.10%

    0.67%

12/31/12 – 5/31/13

2.91%

     2.98%

  2.85%

1.81%

3.02%

  8.71%

12/31/11 – 5/31/12

3.82%

     3.94%

 3.79%

2.76%

4.94%

    3.46%

Source: S&P/LSTA Leveraged Loan Index.

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Valeant launches amendment, details structure of M&A financing, Bausch & Lomb buy

Valeant Pharmaceuticals yesterday approached its lenders for an amendment related to its planned $8.7 billion acquisition of Bausch & Lomb, which was announced earlier this week.

Meanwhile, the company also disclosed that it plans to finance the transaction with a new $4.3 billion term loan, $3.225 billion of unsecured notes and plans to issue $1.5-2 billion of new equity.

The amendment on the table would allow the Canadian pharmaceutical company to incur the incremental debt proposed to support the acquisition, and revise the definition of EBITDA to allow for certain add-backs related to the acquisition, among other things, sources said.

Add-backs and synergies would boost March 31 LTM adjusted EBITDA of $2.035 billion by an additional $433 million, to $2.468 billion to achieve the credit stats outlined in the lender presentation. Net leverage would run 2.1x through the secured debt and 4.6x on a total basis, based on pro forma LTM adjusted EBITDA of $3.91 billion and assuming a $1.75 billion equity raise, according to the company. Add-backs and synergies could total as much as $800 million annually, according to Valeant.

Per the terms of the amendment, the incremental debt would not be included per the calculation of the financial covenants governing Valeant’s existing loans, sources added. The company existing credit agreement contains senior-secured-leverage and interest-coverage tests.

Some investors have already sounded a cautious note on what they view as an aggressive task in a softening market. There’s no fee on offer and arranger Goldman Sachs is looking to wrap up the amendment by June 6, prior to launching the bridge loan, sources said.

Valeant has some room to issue additional debt now; the current incurrence tests allow for up to 2.5x senior secured debt and 5.25x total, but that’s not sufficient for the large fund raising contemplated here without being able to lump in Bausch’s cash flow.

Some investors fret that the 50 bps MFN protection – while completely in line with market convention – might be insufficient to prevent their loans from trading off as more than $4 billion of new bank debt is placed in what’s become a choppy market in recent days. While inflow into loan funds remain buoyant, cross-over buyers have been under selling pressure, sources noted.

Even so, the amount of net new-money institutional debt boils down to roughly $1.3 billion when you subtract the approximately $3 billion of dollar-denominated institutional loans outstanding at Bausch & Lomb. Moreover, Valeant’s term debt is arguably already priced at a premium relative to some recent comparable transactions, including B+/B1 Hertz (L+225, with a 0.75% floor) and B+/B1 HCA (L+275, with no floor).

Still, with just over 50% of Valeant’s loans in the hands of commercial banks, the amendment is likely to pass. For reference, Valeant’s existing bank debt comprises a $450 million revolver due April 2016 (L+225), a $1.96 billion A term loan due April 2016 (L+225), a $1.3 billion series D term loan due February 2019 (L+275, 0.75% LIBOR floor) and a $1 billion series C term loan due December 2019 (L+275, 0.75% floor).

In the secondary market, Valeant’s institutional series C and series D term loans due 2019 (L+275, 0.75% floor) were quoted at 99.875/100.375 this morning, which is off about a quarter of a point from early yesterday and either side of 101 prior to the news of the acquisition, sources said. The decline in the paper comes amid choppy market conditions this week.

Corporate ratings are BB/Ba3, though S&P placed the company’s ratings on CreditWatch with negative implications on the news of the proposed acquisition. – Staff reports

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Fifth Third hires Charlie Stearns in Chicago for syndications team

Fifth Third Bank has hired Charlie Stearns as managing director for the bank’s syndicated finance team in Chicago, according to the bank. Stearns reports to Rich Hillsman, senior managing director.

Stearns joins from J.P. Morgan, where he worked with middle-market clients in the Midwest. Prior to J.P. Morgan, Stearns worked at GE Capital and Bank of America Merrill Lynch. He also has buyside experience from working on the CLO platforms of CapitalSource Finance and Denali Capital. – Kelly Thompson

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European CLO pipeline remains at €1.4B amid regulatory uncertainty

Last week’s EBA revisions may have dealt a blow to the CLO market, but at this point it doesn’t look to be a mortal one, with players already suggesting there could still be options available for managers seeking to structure and price new vehicles, even those without deep-pocked parents.

As reported, the Capital Requirements Regulation (CRR) effectively removes the flexibility around the definition of sponsor, meaning that the CLO manager as a credit institution or an investment firm has to raise and retain the 5% risk-retention requirement, rather than relying on a third party to provide and retain the equity. This change means that the majority of vehicles that have priced this year, as well as many of those in the pipeline, fall outside of the new guidelines, according to sources.

LCD has tried to piece together the pipeline as it stands post-EBA, but few managers have been willing to comment, which is understandable given the ongoing lack of clarity around the developments.

That CELF Advisors is pressing ahead with its Carlyle Global Market Strategies Euro CLO 2013-1 is encouraging, but perhaps not surprising given it is one of the few managers that remains compliant with the CRR after the revisions. In addition, ICG’s planned €400 million transaction via Lloyds should be unaffected, with the manager raising and retaining its own equity, sources added.

Non-compliant? Proceed as planned
There are many moving parts, and lawyers suggest that managers may still go ahead and price vehicles that are non-compliant with the CRR for several reasons. GoldenTree is said to be continuing with its transaction – a refinancing of an existing European CLO with a third party providing the equity – despite acknowledging that it will be non-compliant, according to sources.

First, non-compliance itself does not come with any express sanctions for those structuring a transaction, although they could be subject to punitive capital requirements, according to a briefing note by Clifford Chance.

And while the initial CLO investors in a vehicle structured according to Article 122a will not face any punitive capital requirements, they will be unlikely to trade out of that vehicle in the future, given that any new investor coming into a non-compliant vehicle will be subject to these penalties.

Also, some suggest that it would be possible to structure a new vehicle with third-party equity and to replace the equity retention provider in due course, though this would be a costly and time-consuming undertaking.

For those wanting to be compliant from the outset, lawyers suggest it may be possible for a third party or affiliate outside of the CLO manager’s regulatory supervisory group to provide the equity as a loan to the CLO manager, but this comes with its own set of expensive tax implications, sources say.

And in the U.S., the LSTA and its working group are in discussions with regulators for alternative CLO structures that will be compliant with the Dodd-Frank Act, whereby the CLO manager would hold 5% of the equity, as well as unfunded Class M notes that replicate and replace the fee stream, sources say. However, risk-retention rules in the U.S. don’t kick in for at least another two years, thus leaving the U.S. CLO market with more time to iron out the details than in Europe.

The following chart shows the pipeline as it stood prior to the EBA’s announcement, but apart from CELF Advisors, ICG, and GoldenTree, it’s unclear which other managers will continue with their pricing efforts.

Total volume in the year to date stands at €1.338 million.

Already priced
When it comes to the four vehicles that have priced – namely Cairn Capital’s Cairn CLO III, Pramerica’s Dryden XXVII Euro CLO 2013, Apollo’s ALME Loan Funding 2013-1 CLO, and GSO-Blackstone’s Grand Harbour I – sources suggest that Pramerica may be the only one that is compliant with CRR.

Some say that GSO-Blackstone may be compliant on the basis that Mediterranean Bank, as the credit institution, provided the collateral pool and is involved on an ongoing basis, thereby fulfilling the criteria to be the retention provider. However, its compliancy is unconfirmed at this point. Nonetheless, the general consensus in the market is that Cairn Capital and Apollo are not compliant, with the former utilising a third-party investor – the San Bernardino County Employees’ Retirement Association – to retain the 5% equity, while the latter is said to have put the equity in a non-EU insurance subsidiary, according to sources.

In the U.S., the pipeline of CLOs in various stages of the rating process – but for which final ratings have not yet been assigned – increased to $15.42 billion, from $14.88 billion the previous week, according to a report from S&P’s Structured Finance Ratings Group.

S&P expects $33 billion of new vehicles to close based on deals in the pipeline, versus $32 billion the previous week. On the other side of the ledger, optional redemptions for CLOs based on notices received by S&P now stand at roughly $10 billion, unchanged from last week. YTD issuance is $33.3 billion from 59 managers, versus $13.8 billion from 29 managers in the year-ago period. – Staff reports

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European leveraged loan prices fall from recent highs amid broad-based weakness, US mart unchanged

Amid general market weakness, the average bid of LCD’s European loan flow-name composite fell 20 bps during the week ended May 30, to 100.41% of par (based on Markit pricing). This is the biggest swing in the last seven weeks, and it is only the fifth negative reading so far in 2013. As a result, the average is at its lowest level since mid-April, although it remains 307 bps above the final reading of 2012.

LCD’s broad secondary composite, which reflects a wider universe of deals, fell two basis points during the week ended May 30, to 85.44, marking the first decline in six weeks. Still, the average bid remains 134 bps above 2012’s closing level.

Advancers lag decliners 
For the first time since July 2011, not a single issue in the flow-name sample advanced from the prior week’s level. Nine names declined, by an average of 23 bps, and one was unchanged.

Decliners also led on a month-on-month basis, with seven facilities declining (by an average of 30 bps) and three advancing (by an average of 14 bps).

In LCD’s broad secondary composite, advancers led decliners on a monthly basis, but lagged on a weekly basis.

Bid/ask spread widens 
The average bid/ask spread of the flow names widened four basis points on the week, to 76 bps. The bid/ask spread has tightened 28 bps in the year to date.

The average bid/ask spread for the broad composite widened four basis points on the week, to 188 bps. The average bid/ask spread for the most liquid segment of the broad composite widened three basis points, to 129 bps, while the average bid/ask spread for the least liquid segment of the broad composite widened by four basis points, to 218 bps.

Discounted spreads unchanged 
As the average bid declined this week, the average discounted spread to maturity widened to 425 bps, a five-week high. Still, the average discounted spread is 83 bps narrower in the year to date.

S&P European Leveraged Loan Index (ELLI)

The ELLI distress ratio – defined as the share of performing loans trading below 80 – retreated to 16% for the week ended May 24, from 17% in the prior four weeks. At the end of 2012 the distress ratio stood at 19%.

Using a start date of Dec. 31, 2003, the Sharpe ratio for the ELLI (based on total return excluding currency) was 0.54, unchanged from last week. The 2012 closing reading was 0.46. The Sharpe ratio for the MLEHY was 0.73, also unchanged from last week; the 2012 closing level was 0.69.

U.S./Europe comparison 
The average bid of LCD’s U.S. loan flow-name composite fell 34 bps during the week ended May 30, to 98.96% of par, and is down more than a point in the last three weeks. As a result, the gap between the average bids of U.S. and European flow-name composites widened to 145 bps, from 131 last week, with the European names trading at a premium for the ninth consecutive week. This is the highest premium on the European average since September 2011.

The average bid/ask spread for the U.S. flow names was 44 bps, unchanged from last week.

The average spread to maturity across the U.S. flow-name composite is L+438, two basis points wider from last week’s reading. The average spread to maturity of the European composite is now 13 bps narrower than its U.S. counterpart.

The U.S. flow names are AllisonAvayaCaesarsChryslerCommunity HealthDel MonteFirst Data,Fortescue MetalHCAH.J. HeinzIntelsat JacksonNeiman MarcusNRGReynolds Group, andUnivision.

The European flow names are Alliance BootsBSN MedicalConvatecDuPont PerformanceGala Coral GroupIglo Birds EyeIneosNumericableUPC Financing, and Wind Telecommunicazioni. – Staff reports

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Cash inflow streak to loan mutual funds hits 50 weeks

Retail-cash inflows into bank loan mutual funds and exchange-traded funds totaled $950.5 million for the week ended May 29, according to Lipper FMI. It’s the 50th consecutive positive reading for a total inflow over that span of $29.4 billion.

This week’s figure is down from $1.24 billion last week but above the $871 million from the week prior. It is also short of the four-week trailing average of $1.02 billion, which is at a seven-week high and up from $993 million last week. ETFs added $112 million, the lowest level in six weeks. That accounts for about 12% of the inflow, the lowest rate since the week ended April 3, according to Lipper data.

Looking at results in the year to date, inflows are $21.9 billion, with $18.9 billion to mutual funds and $3.1 billion directed towards ETFs. For comparison, net cash inflows over the same period a year ago totaled $1.7 billion, with the comparable breakdown of $1.24 billion and $453 million, respectively.

Total assets of the weekly reporter sample were $67.8 billion at the end of the latest observation period, which after stripping out the inflow shows a decrease of about $227 million due to market conditions. Total assets are up $25.8 billion in the year-to-date, for a 61% expansion. – Jon Hemingway

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Leveraged loans lose 0.06% today; YTD return is 2.97%

Loans lost 0.06% today after losing 0.10% 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 0.08% today.

In the year to date, loans overall have gained 2.97%.

 

LCD Daily Loan Index – May 30, 2013

TOTAL RETURNS

All

Perf. Loans

L100

BB

B

CCC

For 5/30/13

      -0.06%

      -0.07%

      -0.08%

  –0.06%

  -0.07%

    -0.08%

For 5/29/13

      -0.10%

      -0.10%

      -0.13%

  -0.05%

  -0.09%

    -0.53%

 

 

 

 

 

 

 

Month-To-Date 5/30/13

 0.24%

      0.19%

  0.19%

 0.12%

0.15%

    0.78%

12/31/12 – 5/30/13

2.97%

      3.03%

  2.93%

1.86%

3.07%

  8.84%

12/31/11 – 5/30/12

3.91%

      4.02%

  3.91%

2.81%

5.02%

    3.64%

 

Source: S&P/LSTA Leveraged Loan Index

 

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CLO volume nears $1B for week; YTD volume: $34B

clo issuance 5.29.13

CLO issuance in the U.S. rebounded from its second no-issuance week of 2013 with $937 million of vehicles priced over the past 7 days, bringing the month-to-date total to $4 billion.

There were a pair of CLOs during the week, a $515 million deal via GSO/Blackstone (Tryon Park) and a $421 million vehicle via NewMark. Year t0 date there has been $34.2 billion in CLO issuance.

As always, you can read more about CLOs in LCD’s online Loan Market Primer.