S&P: CLOs show strong historic performance with few defaults

The CLO asset class has performed strongly, according to a recent report from S&P (“Twenty Years Strong: A Look Back At U.S. CLO Ratings Performance From 1994 Through 2013”), with few negative rating actions on senior notes due to underlying collateral deterioration, few defaults, and minimal loss rates since the agency started rating the asset class in the mid-1990s.

The data show that very few rated CLO 1.0 tranches have defaulted despite these CLOs weathering at least one recession (and in some cases two). The agency believes the data show that CLOs are a robust platform that has been able to withstand significant levels of economic stress, and one that should continue to demonstrate a positive performance, provided that the leveraged loan default rate remains low.

Looking at the default statistics, of the over 6,100 ratings issued by S&P on over 1,100 U.S. CLO transactions, only 25 tranches have defaulted and had their rating lowered to D as a result. Based on this, S&P calculated a 0.41% default rate, or just over four tranches for every 1,000 it has rated.

In addition to the tranches that have already defaulted and had their ratings lowered to D, there are still another seven CLO tranches currently carrying a CC rating (used when the agency expects default to be a virtual certainty, regardless of the anticipated time to default).

Assuming that all seven of the CLO tranches rated CC ultimately will default, the default rate would be 0.52%, or just over five tranches for every 1,000 rated.

Most of the CLO tranche defaults occurred in the wake of the 2008 financial crisis.

The 25 defaulting CLO tranches can be grouped into one of these general categories:

  • Collateral deterioration (12 tranches)
  • Market-value provisions (six tranches)
  • Missed interest on non-deferrable notes (five tranches)
  • Investor actions (two tranches)

Analysis of the full universe of rated CLOs shows that at year-end 2013 only eight investment-grade CLO tranches (or 0.15% of the notes originally rated BBB- or higher) have defaulted, while 17 speculative-grade CLO tranches (or 1.78% of the notes originally rated BB+ or lower) have defaulted. This compares very favorably with the percentage of rated speculative corporate loans that have defaulted.

Notably, no tranches originally rated AAA or AA experienced a loss. For the limited number of tranches that experienced a default, S&P observed losses averaging in the mid-40% area for tranches originally rated investment-grade, and the mid-50% area for tranches originally rated below investment-grade.

2013 CLO performance remains strong

Since the mid-1990s, Standard & Poor’s Ratings Services has rated more than 1,100 U.S. cash-flow CLOs with an aggregate note balance of more than $645 billion (including equity). At year-end 2013, 705 of these CLOs were still outstanding, with an aggregate note balance of approximately $293 billion, versus 654 CLOs and $279 billion at the start of the year.

As of year-end 2013, S&P had 402 CLO 1.0 transactions remaining (or $151 billion in volume terms), versus 303 CLO 2.0 transactions (or $143 billion).

The same positive rating performance trends of the past several years continued in 2013, primarily due to the generally positive performance of the underlying corporate loan collateral.

Performance indicators benefiting CLO transactions include:

  • Stable rating performance of non-financial U.S. speculative-grade companies
  • A continuation of low leveraged loan default rates through 2013
  • Elevated loan repayment rates

This stable collateral performance has translated to stable rating performance among CLO 2.0 transactions, and, combined with the amortization of senior tranche balances, upgrades on many CLO 1.0 transactions on the back of large paydowns to senior notes.

Those downgrades to CLO 1.0 ratings that did take place in 2013 mostly occurred in CLOs that had paid down significantly, but which are now left with small, relatively concentrated portfolios with significant exposure to loans from CCC companies.

CLO 2.0 transactions continued to show stable rating performance in 2013, with a few upgrades and no downgrades. – Staff reports


Apollo readies $725M leveraged loan backing Chuck E. Cheese LBO

chuck e cheeseDeutsche Bank, Credit Suisse, Morgan Stanley, and UBS have scheduled a bank meeting for 2:00 p.m. EST on Tuesday, Feb. 4 to launch a $725 million, seven-year covenant-lite term loan backing Apollo Global Management’s $1.3 billion acquisition of CEC Entertainment, according to sources.

Price talk is not yet available. Financing for the LBO also includes a $150 million, five-year revolving credit facility and $305 million of unsecured notes. Credit Suisse will be left lead on the adjoining bond deal.

CEC, which operates pizza and family entertainment chain Chuck E. Cheese’s, announced earlier this month that Apollo agreed to purchase the company, for $54 per share, or $1.3 billion, including the assumption of debt.

The sale was the result of a strategic review aimed at boosting revenue and profit. Revenue dipped slightly in the fiscal third quarter ended Sept. 29, 2013, to $195.9 million, from $196.6 million in the comparable 2012 quarter, while operating income fell to $13.2 million from $14.5 million. – Kerry Kantin/Abby Latour


Leveraged loan funds see $460M inflow; streak hits 85 weeks and $63B

loan fund flows

Retail cash inflows to bank loan mutual funds and exchange-traded funds totaled $460 million for the week ended Jan. 29, according to Lipper, a division of Thomson Reuters. Of the total, just 4% was tied to the ETF segment, down from 9% of last week’s net $804 million inflow.

While down from last week, the inflow nonetheless extends the net inflow streak to 85 weeks, with a total of $63.1 billion over that span, by the weekly reporters only.

The four-week trailing average ticks up to $805 million, from $726 million last week, and $692 million two weeks ago.

Year-to-date inflows total $3.4 billion, of which $323 million were ETF-related, or 10% of the sum. In the comparable year-ago period, inflows were $3.3 billion, 12% of which were tied to ETFs.

Last year’s full-year inflow totaled $52.3 billion, of which 10% was tied to ETFs.

The change due to market conditions was negative for the first time in 18 weeks, at $111 million. Total assets stood at $105.4 billion at the end of the observation period, with ETFs comprising $7.6 billion of the total, or approximately 7% – Matt Fuller


Atlantic Power readies $800M leveraged loan backing refi, distribution to parent

atlantic power logoGoldman Sachs and Bank of America Merrill Lynch are holding a bank meeting at 1:30 p.m. EST on Monday, Feb. 3 to launch a new financing for Atlantic Power L.P. The deal will include a $200 million revolver and a $600 million, seven-year B term loan.

Proceeds will be used to refinance debt and fund a distribution to the issuer’s publicly held parent, Atlantic Power Corp.

Atlantic Power L.P. operates 17 generating stations that produce roughly 1173 net megawatts of power in six states and two Canadian provinces. About 1073 megawatts of that offtake is contracted under long-term power purchase agreements with a remaining weighted average contract life of 7.1 years, sources noted.

The new revolver will replace the issuer’s current $150 million RC. The distribution to Atlantic Power Corp. would help to redeem a portion of its 9% notes due 2018, as well as the $190 million of 5.9% notes due 2014 issued by Curtis Palmer LLC; along with $150 million of 5.87% of Series A guaranteed notes due 2015 and $75 million of 5.97% Series B guaranteed notes due 2017 issued by Atlantic Power (US) GP.

The loans will be governed by total-leverage and interest-coverage tests.  In addition, Atlantic Power L.P.’s existing $210 million of 5.95% medium term notes due June 23, 2036 would receive an equal and ratable security interest in the collateral package securing the new credit facilities.

Parent Atlantic Power owns and operates a diverse fleet of power generation assets in the US and Canada. – Chris Donnelly


West Gate Horizons/MetWest launch Aristotle Credit Partners

West Gate Horizons Advisors is partnering with a team of veteran credit investors to form Aristotle Credit Partners. The union will create a larger, more diversified platform and client base, while offering institutional clients a broad suite of credit products.

Aristotle Credit Partners combines West Gate Horizons’ team and experience in managing bank loans with investment professionals specializing in managing high-yield bonds and high-grade corporate strategies. West Gate Horizons Advisors will continue to manage leveraged credit in the form of CLOs. Almost all its employees will hold similar positions at Aristotle Credit Partners.

Michael Hatley is portfolio manager for bank loans for Aristotle Credit Partners, Douglas Lopez will be the portfolio manager for high-yield strategies, and Terrence Reidt will be the portfolio manager for high-grade corporate strategies.

Hatley remains president and portfolio manager of West Gate Horizons Advisors, and Graydon Wilcox will continue as the CFO and CCO for West Gate Horizons Advisors while assuming the same responsibilities at Aristotle Credit.

Richard Hollander will serve as chairman of the Board of Aristotle Credit Partners. Through MetWest Ventures Hollander has been the majority owner of West Gate Horizons Advisors for more than eight years. He also serves as chairman of the board for Aristotle Capital Management, which with $6.6 billion in assets under management as of Dec. 31, 2013, will provide certain important administrative services to Aristotle Credit Partners. – Staff reports


Europe: Alcentra finances buyout of Chesapeake’s Plastic Packaging

Alcentra has provided a unitranche to support the buyout of Chesapeake‘s Plastic Packaging Division by CEREA Partenaire, together with Bpifrance, Chemark and management. As well as supporting the buyout, the roughly €25 million, seven-year unitranche will provide capital for the business’ growth strategy in areas of high agricultural development, particularly in Brazil and Russia.

Frederic Mereau from Alcentra’s European Direct Lending and Mezzanine Investments team will represent the firm on the company’s Board of Directors as an observer.

The division, which will soon be renamed, combines the former activities of Chesapeake Specialty Chemicals Packaging in France, the U.K., and Hungary.

Headquartered in France and founded in 1987 by its current CEO, Jean-Philippe Morvan, the company is the European leader in specialty plastic packaging barriers, focusing on delivering high-quality products and services for the transport and storage of goods to customers, predominantly trading in the agrochemical and flavouring sectors.

The deal follows recent investments in Cambridge Education and Caffe Nero, as well as a U.K. waste management business (all executed over the last month).

Alcentra has been sourcing and arranging financing to middle-market businesses since its launch in 2003. To date, the company has invested over €1.8 billion in more than 85 middle-market transactions across senior debt, second lien, mezzanine, and equity co-investments. – Sarah Husband


84 Weeks and counting: Leveraged loan funds see $804M cash inflow

loan fund flows

Retail cash inflows to bank loan mutual funds and exchange-traded funds totaled $804 million for the week ended Jan. 22, according to Lipper, a division of Thomson Reuters.

That total is down from inflows of $1.05 billion last week, but it extends the net inflow streak to 84 weeks with a total of $62.3 billion over that span.

The four-week trailing average rises to $726 million, from $692 million last week, and $555 million two weeks ago.

ETF flows were $73 million, or 9% of the total this past week, up from 6% of flow last week.

Year-to-date inflows total $2.9 billion, of which $306 million were ETF-related, or 11% of the sum. In the comparable year-ago period, inflows were $2.3 billion, 14% of which were tied to ETFs.

Last year’s full-year inflow totaled $52.3 billion, of which 10% was tied to ETFs.

The change due to market conditions was $41 million in the past week, essentially the same as the previous week. Total assets stood at $105 billion at the end of the observation period, with ETFs comprising $7.6 billion of the total, or approximately 7%. – Matt Fuller


Europe: Howard joins Santander in middle-market leveraged loan role

santanderNick Howard has started a new role as a senior manager at Santander, looking after new mid-market leveraged loan opportunities, as well as managing the bank’s existing positions.

Previously, Howard worked at Investec as a CLO portfolio manager. He has also held positions as a leveraged loan analyst at Sumitomo, and credit analyst at both Danske Bank and FCE Bank. – Sarah Husband