Returns by asset class: Leveraged loans lead pack in grim June

returns by asset class

The performance of U.S. leveraged loans during the second quarter reflected the modestly falling fortunes of the market. After eking out a 0.19% return in May, the S&P/LSTA Leveraged Loan Index fell 0.59% in June (as of June 27), the largest monthly loss since May 2012. Of course, loans held up far better than either equities or fixed-income products, all of which suffered when expectations for rising rates drove the 10-year Treasury yield to 2.48% by June 27, from a recent low of 1.66% in May and 1.78% at year-end, according to the Federal Reserve. – Steve Miller



On pace for record year, leveraged loan volume tops $160B in 2Q

leveraged loan volume 2q 2013a

Leveraged loan activity in the U.S. during the second quarter clocked in at $161 billion, down from the record $189 billion logged during the first quarter of the year, but impressive nonetheless. Indeed, despite a relatively lackluster June it was the third-highest quarterly figure ever (there was $188 billion recorded during the second quarter of 2007).

For the first half of 2013 volume was still up big, rising 73% year-over-year, to $351 billion, the second-highest two-quarter total ever, behind only the $373 billion recorded from January to June 2007.

Institutional volume jumped an even more profound 122%, to $267 billion, also just short of the record $284 billion from the first half of 2007. On both counts, moreover, volume is on pace to exceed 2007’s record total of $535 billion/$360 billion. Volume would have to plunge 55% (institutional) and 47% (overall) for 2013 to fall short of the top of the historical leaderboard.

Of course, refinancings are driving volume so far in 2013, particularly in the private equity segment, where lucrative LBO financings remain few and far between.

annual leveraged loan volume


S&P: European leveraged loan recoveries remain strong

First-lien debt recoveries remain strong, at a mean nominal 78% for the period 2003-2012, according to a study from Standard & Poor’s published earlier this week, titled “Europe’s Senior Loan Market Continues To Deliver A Strong Recovery Performance”.

The recovery rate is marginally higher than the 76% recorded in the agency’s previous study that covered 2003 to 2010, and is broadly in line with the nominal rate of 83.6% for U.S. loan facilities. The stability in recovery rates suggests the year of issue or default does not play a meaningful role in the recovery data, with the possible exception of 2008, which had a recovery rate 10% below average.

Breaking down the data further to look at publicly rated companies only, the mean recovery rate for first-lien debt here has increased only marginally, from 62% to 63%. Large defaults from Lyondell Basell (recovery in the 60-70% range) and Win Hellas (recovery in the 0-10% range) help to explain these lower recoveries.

Moving down the capital structure to look at senior unsecured debt (primarily speculative-grade bonds rated BB+ or below), S&P found a recovery rate of 48% between 2003 and 2012. This compares with the U.S. long-term empirical average of 51% for senior unsecured bonds, or 45.7% for all bonds.

Second-lien recoveries have improved from 31% in the last study to 37%, but fare little better than mezzanine recoveries, which stand at 35%. In its conclusions, S&P says these figures suggest second-lien debt would appear to be more like underpriced mezzanine than stretched senior debt, although it points out this class tends to form a relatively small part of most issuers’ capital structure. This in turn means second-liens are highly likely to achieve either full or zero recovery in a default scenario.

The full report is titled “Europe’s Senior Loan Market Continues To Deliver A Strong Recovery Performance”. Subscribers to RatingsDirect can access the research piece at Alternatively, to purchase/access the report, please contact Client Support Europe: +44 20 7176 7176 or [email protected]. – Staff reports



Blackstone’s United Biscuits eyes refinancing of leveraged loans

United Biscuits will outline details of a full refinancing of its outstanding facilities to lenders at a meeting on July 1 in London. J.P. Morgan and Goldman Sachs are bookrunners for the new facility, which will include a £650 million, seven-year TLB (denominated in euros and sterling), and a £75 million RCF.

The borrower’s sterling term loan is wrapped around 99.625 today, according to sources.

A refinancing has been on the cards since sponsors Blackstone and PAI agreed the sale of KP Snacks to Intersnack in December 2012, although there were reports the sponsors may also look to exit the business via a full sale. The two sponsors had previously considered their options for the business in 2010, including a possible sale or IPO.

In 2006, Blackstone and PAI bought the business from Cinven, MidOcean, and PAI, backed by a £1.45 billion debt package arranged by Barclays, Goldman Sachs, and J.P. Morgan.

Continuing revenue in 2012 stood at £1.05 billion – essentially unchanged from the previous year – while profits declined to £169.8 million versus £173.5 million in 2011, according to the borrower’s 2012 annual report. Sales in the company’s Continental Europe operations were particularly impacted by the weakening of the euro exchange rate, while the decline in profits largely reflects the disruption and additional overhead cost from the separation of the KP Snacks business, according to the annual report.

Net debt (comprising senior, second-lien, and mezzanine facilities) was £1.02 billion at the end of 2012, down 5.4% from £1.09 billion at the end of 2011. The figure for 2012 includes a senior debt repayment of £49.2 million, but does not include any proceeds from the disposal of KP Snacks, as this was not completed until January 2013.

United Biscuits is a manufacturer and marketer of biscuits in the U.K., Netherlands, France, Belgium, and Ireland, and is also growing its international business outside Europe. The company’s brand names include McVitie’s, Penguin, go ahead!, McVitie’s Jaffa Cakes, Jacob’s, Jacob’s Cream Crackers, Twiglets, Mini Cheddars, BN, Delacre, Verkade, and Sultana. The firm employs roughly 8,900 people, of whom 7,000 work in the U.K. – Staff reports


MP Senior Credit Partners prices $300M CLO via Greensledge, PNC

GreensLedge Capital Markets and PNC Bank recently priced a $300.25 million CLO for MP Senior Credit Partners, according to sources.

The transaction is structured as follows:

Sources note the weighted average coupon of the two triple-B rated tranches is just south of L+400. The deal has a two-year non-call period and a four-year reinvestment period. – Kerry Kantin 


ResCap settlement with Ally approved, examiner’s report unsealed

Residential Capital may enter into a $2.1 billion settlement and plan-support agreement with its parent, Ally Financial, U.S. Bankruptcy Court Judge Martin Glenn ruled this morning, establishing a framework for working toward confirmation of a reorganization plan.

Judge Glenn also said he will unseal the 2,235-page report filed by former Bankruptcy Court Judge Arthur Gonzalez, who was appointed as an examiner in the case last July to investigate, among other things, “all material pre-petition transactions” involving ResCap, Ally, and equity sponsor Cerberus Capital Management. The report specifically evaluates potential claims and causes of action related to fraudulent conveyance, equitable subordination, alter ego and veil piercing, fiduciary duty, debt recharacterization, unjust enrichment, and securities law violations.

Approval of the PSA paves the way for ResCap to file its proposed reorganization plan by July 3, Morrison & Foerster partner Gary Lee told a packed courtroom (Lawyers spilled over into two overflow rooms, an unusually large turnout for the bankruptcy court). “I think the PSA is a signal accomplishment in this case,” Judge Glenn said. But, he warned, the PSA is not a disclosure statement or a reorganization plan – “those are important steps to come.”

“Without the PSA, however, this case would return to Square One,” Glenn said.

Separately, Lee said this morning that ResCap had also reached an agreement with the Federal Reserve to establish a $230 million escrow fund to repay home-mortgage borrowers, ending an investigation into the company’s foreclosure practices.

ResCap first announced the settlement and plan-support agreement with Ally in May. The deal tops Ally’s initial pre-petition settlement offer by $1.35 billion. The agreement settles all existing and potential claims between ResCap and Ally, and potential claims held by third parties in relation to ResCap. Certain securities claims by the Federal Housing Finance Agency and the Federal Deposit Insurance Corporation, as receiver for certain failed banks, are exempted from the settlement.

Ally will contribute $1.95 billion in cash to the ResCap estate on the effective date of its eventual plan, as well as the first $150 million from insurance proceeds it expects to receive related to releases in connection with the plan. The agreement also requires that Ally receive full repayment of its secured claims, including $1.13 billion owed under existing credit facilities.

The settlement was reached as part of the mediation in the case being led by Bankruptcy Court Judge James Peck. Ally’s potential liability to ResCap and, derivatively, its creditors, is a central issue in the proceedings. The crux of the dispute is whether Ally, using its corporate control over ResCap and its management, wrongfully engineered certain transactions beginning in 2006 that transferred key ResCap assets out of the reach of creditors in the wake of the housing-market meltdown, leaving ResCap insolvent and leading to its bankruptcy.

At the time it filed Chapter 11, ResCap and Ally had agreed to a purported $750 million settlement of the potential claims. Key ResCap creditors, however, balked, with the creditors’ committee beginning its own investigation into the transactions and the bankruptcy court appointing Gonzalez to look into the transactions.

Subsequently, the creditors’ committee sought derivative standing – supported by the company – to file suit arising out of the transactions, arguing that Ally’s liability could potentially cover all claims in the case, from $20-25 billion. The settlement approved today brings an end to that suit, but does not prevent the creditors’ committee from objecting to ResCap’s eventual disclosure statement or plan. Judge Glenn and a parade of lawyers making appearances in court today repeatedly hinted at what is expected to be a lengthy and heavily contested confirmation hearing.

Besides ResCap and Ally, other key stakeholders that are parties to the settlement include the official unsecured-creditors’ committee, Wilmington Trust (which is the indenture trustee for nearly $1 billion in ResCap notes), AIG Asset Management, Allstate Insurance Co., FGIC, representatives of litigants in various class action suits pending against ResCap, certain RMBS investors related to securitizations backed by the company, and certain trustees or indenture trustee for certain mortgage-backed-securities trusts. – John Bringardner