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US Leveraged Loan Volume Sputters to 4-Year Low Despite Solid Credit Fundamentals

US leveraged loan volume

The final quarter of 2015 brought what was already a challenging year for the U. S. leveraged loan market to a less-than-jolly conclusion. New-issue volume stalled. Sputtering loan demand was the proximate cause, despite an environment of solid credit fundamentals.

CLO issuance dropped in the fourth quarter (note that all 4Q and YTD figures are through Dec. 17) to a 2-year low of $17.6 billion. Loan mutual funds that report weekly to Lipper FMI suffered $3.4 billion of outflows.

And the prospects for capital formation in the first quarter seem no better.

quarterly-leveraged-loan-volume

Indeed, new issue activity in 2015 is at a four-year low. It’s $421.4 billion through Dec. 17, down from $528.1 billion in 2014 and from a record $607.1 billion in 2013. Institutional activity – loans syndicated to non-bank investors – has accounted for the brunt of the decline, falling to $259.3 billion YTD, from $376.7 billion in 2014, according to S&P Capital IQ LCD.

Amid the choppy conditions, new-issue volume has been lackluster, at $74.1 billion in the fourth quarter, down from $113.2 billion in the third quarter but up from $66.7 billion in 2014′s fourth quarter, when collapsing 0il & gas prices spooked the equity and credit markets.

Drilling down, institutional loan volume in the fourth quarter of this year is $52.1 billion thus far, also down sequentially but up year-over-year, from $65.7 billion and $43.4 billion, respectively. Likewise, pro rata volume thus far in 2015′s fourth quarter is $22 billion, versus $47.6 billion in the third quarter and $23.3 billion in the final quarter of 2014. – Steve Miller

This story first appeared on www.lcdcomps.com. (You can learn more about LCD here.)

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Highly Leveraged Loans in Europe Scarcer as Market Eyes US Regulators

european highly leveraged deals

The impact of leveraged loan guidelines announced by U.S. regulators has had some impact overseas.

The share of loans with leverage of 6x or more syndicated in the European market dropped to 14% in 2015 from 23% in 2014, according to S&P Capital IQ LCD.

It should be noted, however, this does not mean the market as a whole has become decidedly more conservative. Competition for mandates – among banks but increasingly with cash-rich direct-lenders in the mix – is showing up on smaller deals. – narrowing the gap in leverage between smaller and larger deals, and feeding into complaints from some investors that smaller European deals are being pushed too hard. – Ruth McGavin

Follow Ruth on Twitter for leveraged loan news  and insight.

This story was first published on www.lcdcomps.com. Check out LCD News for complete leveraged loan and high yield bond news and analysis. 

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Barclays, Ares to Pair, Provide Middle Market Loans to UK Cos.

Barclays Corporate Banking and Ares Management have agreed a partnership whereby the pair will provide financing to U.K. mid-market companies.

To underpin the partnership, Ares has purchased a portfolio of performing leveraged loans issued to U.K. mid-cap, sponsor-backed companies with a book value of roughly £500 million from Barclays Corporate Banking.

Barclays said it remained committed to the U.K. mid-market, and will continue to provide debt and wider banking services to such companies.

The partnership with Ares is non-exclusive and allows the pair to offer financing solutions including senior and unitranche loans, revolving credit, and capex facilities to U.K. borrowers.

The arrangement differs to Ares’ previous partnership with GE Capital, which was based around two formal joint venture vehicles, namely the European Senior Secured Loan Programme (ESSLP) and European Loan Programme (ELP).

The deal between Ares and Barclays follows a similar arrangement between RBS, AIG Asset Management, Hermes Investment Management, and M&G Investments announced earlier this month. — Oliver Smiddy

This story first appeared on LCD News.
Check out www.lcdcomps.com for full leveraged loan and high yield bond news and data. 

Follow Oliver on Twitter for news and insight on the European high yield market.

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2016 European Distressed Debt Outlook: No Spike in Leveraged Loan, High Yield Defaults

european distress ratio

High-yield bonds will be under the European restructuring spotlight in 2016, with signs of more distress having emerged recently due to weaker U.S. markets as well as expected troubles in Europe – especially in those sectors vulnerable to weak commodity prices or low consumer spending.

Nevertheless, European bond and loan defaults are not expected to spike next year as ECB measures should keep markets well supported, while low commodity prices will actually have a positive impact on many sectors, be it through lower raw-material costs or an associated pick-up in consumer spending.

According to a recent LCD survey, loan managers’ forecasts for defaults point to a rate of 2–3% by the end of 2016, compared to the current default rate of 2.1% in LCD’s European Leveraged Loan Index (ELLI). S&P Ratings Services expects a rise in the European public corporate speculative-grade default rate to 2.4%, from 1.5% currently.

Despite the benign outlook, the rapid growth of the high-yield market in recent years, riskier credit profiles, rising leverage multiples (adding just over half a turn to 4.6x on average for new issues since the start of 2013, according to LCD), and slower-than-expected economic growth in Europe indicate that the market will see some credit troubles next year.

European credit conditions started showing signs of weakness in the second half of this year, with the ratio of bond distress rising. – Isabell Witt

This story is part of LCD’s complete European Distressed Market Analysis, available to LCD News subscribers. 

Along with the loan/bond distress ratio the story details

  • Primary market bond yields
  • Bond ‘maturity wall’
  • Outstanding bonds, by industry
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Kraton Polymers Shelves M&A Credit Amid Volatile US Leveraged Loan Market

Credit Suisse, Nomura, and Deutsche Bank have shelved the $1.35 billion B term loan backing Kraton Performance Polymers’ acquisition of Arizona Chemical, according to sources. The loan is one of a handful of M&A-related transactions to be shelved amid the recent volatile market conditions.

As reported, the arrangers last week sweetened guidance on the six-year loan to L+500, with a 1% LIBOR floor and a 92 offer price, versus initial talk of L+475–500, with a 1% LIBOR floor and a 98 offer price. The revised deal offered a yield to maturity of about 8.19%, versus 6.36–6.63% at the initial talk. Commitments on the revised transaction were due Wednesday.

The TLB included a secured-leverage test opening at 4x and amortization of 2.5% in the first year and 5% thereafter.

The adjoining $425 million eight-year (non-call three) senior bond offering is also understood to be postponed.

NYSE-listed Kraton recently agreed to purchase privately held Arizona Chemical for $1.37 billion in cash. The transaction represents an approximately 7.4x multiple of Arizona Chemical’s LTM adjusted EBITDA as of June 2015, or 5.5x adjusted for expected synergies, according to the company.

Pro forma leverage at closing will run roughly 4.3x, sources said. The M&A transaction is expected to close late in 2015 or early in 2016.

The financing also includes a $250 million asset-based revolving credit facility, which would be undrawn at closing.

The issuer will be retiring its 6.75% notes due 2019 and its existing ABL facility in connection with the transaction.

Arizona Chemical’s $150 million second-lien term loan due 2022 (L+650, 1% LIBOR floor) is currently callable at 101. The issuer’s first-lien term loan due 2021 (L+350, 1% floor) originally totaled $730 million. Arizona Chemical’s loans were syndicated in June 2014 to refinance debt and fund a $410 million dividend to its owners. Goldman Sachs is administrative agent. American Securities in late 2010 acquired a 75% stake in Arizona Chemical from Rhone Capital, which retained a 25% stake in the company, a producer and refiner of pine chemicals.

Kraton Performance Polymers is a global producer of engineered polymers and one of the world’s largest producers of styrenic block copolymers. — Kerry Kantin/Chris Donnelly

This story first appeared on www.lcdcomps.com. Learn more about LCD here.

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More activism likely in 2016 as BDCs grow up

The BDC industry is experiencing growing pains.

Shares of most BDCs are trading below net asset value. Several BDCs are under attack by activist investors for stock underperformance, and these very public, acerbic battles are casting a pall over the entire sector. The recent market sell-off also punished BDCs as investors fled the credit-focused asset class.

Looking ahead, 2016 is likely to be a year of more shareholder activism for BDCs, market players say, a trend that could ultimately lift BDC share prices in 2016.

“We believe the BDC group could see stock prices increase 5% in 2016. When combined with an average dividend yield of 10%, we expect BDC total returns of 15%. In addition, the growth in shareholder activism could be a further catalyst for the group, particularly for some of the more discounted stocks,” said Troy Ward, an equity analyst at Keefe, Bruyette & Woods, in a Dec. 7 research note.

What won’t likely be a theme next year is raising capital through equity offerings.

“In a period where few BDCs have access to equity capital at accretive levels, earnings growth will be a function of recycling capital and taking optimum advantage of debt capital,” said Merrill Ross, an equity analyst at Wunderlich Securities. “We are looking for earnings growth of approximately 6.7% in 2016.”

Sector dramas unfold
Rifts within the BDC sector will likely widen next year, with battle lines drawn over management fees, the willingness of boards to buy back stock, and whether investors perceive management to be aligned with shareholder interests.

“Activism is going to be a big issue,” said Golub Capital CEO David Golub. Shares in Golub Capital BDC were trading at $16.70 at midday on Dec. 18, a premium to NAV of $15.80 per share as of Sept. 30.

“We are in the midst of what I would characterize as a crisis of confidence in the BDC industry. Investors are skeptical because of self-serving behavior by many BDC managers, often at the expense of their shareholders,” Golub said. The comment was in response to a question on the prospects for the BDC modernization bill, the passing of which Golub believes could be marred by poor timing.

“I hope the industry comes out of this period of activism by becoming a better neighborhood—an industry that’s more focused on shareholder value, that’s more focused on doing things that are fair and good for everybody and not just good for managers. That would be good for the industry.”

For now, all eyes are on dramas involving activist investors, including Fifth Street Finance and Fifth Street Asset Management, which are targets of a class action lawsuit. The suit alleges that the firms fraudulently inflated the assets and investment income of Fifth Street Finance to increase revenue at Fifth Street Asset Management. The firms deny the allegations and are fighting them in court.

Fifth Street Finance has agreed to meet with RiverNorth Capital Management, which is currently the largest stockholder in Fifth Street Finance, with a 6% stake.

American Capital has also been the target of an activist investor since the company unveiled plans to spin off BDC assets. Last month, Elliott Management, which owns an 8.4% stake in the company, urged shareholders to vote against the plan, saying a split would further entrench an ineffective management team that has been overpaid for poor performance and placed valuable assets at risk.

American Capital followed with the launch of a strategic review aimed at maximizing shareholder value, run by an independent board committee and advised by Goldman Sachs and Credit Suisse. Results of the review, which could include a sale of all or part of the company, will be announced by Jan. 31.

American Capital also started a share-buyback program of up to $1 billion of common stock as long as shares are trading 85% below net asset value as of Sept. 30, which was $20.44 per share. Shares were trading at $14.00 at midday on Dec. 18.

In another saga, the board of KCAP Financial, an internally managed BDC, received a letter in October from funds managed by DG Capital Management, its third largest stockholder with a 3.1% stake. DG Capital told the board that selling the business to another BDC would likely reap the best yield to shareholders, who have endured a sustained period of underperformance.

A three-way battle over TICC Capital has intensified in recent months. TICC Capital is urging shareholders to allow Benefit Street Partners, the credit investment arm of Providence Equity Partners, to acquire TICC Management, which manages the investment activities of TICC Capital. NexPoint Advisors, an affiliate of Highland Capital Management, has also submitted a proposal to cut fees and invest in TICC Capital.

The third party, TPG Specialty Lending, has unveiled a stock-for-stock bid for TICC Capital Corp., saying the offer is superior to the competing proposals from either Benefit Street Partners or NexPoint.

The move thrust Josh Easterly, TPG Specialty Lending’s co-CEO, into a prominent role in the drama that could result in such drastic measures as the management company losing its ability to manage a BDC, an outcome that few expected at this time last year.

“Those familiar with our history and investment philosophy understand that it is not in our nature to be public market equity activists,” Easterly said during an earnings call on Nov. 4.

“We have reluctantly assumed this role with respect to TICC as our industry is going through an inflection point,” he said. “We believe that our ecosystem can only thrive in a culture that fosters real value creation for shareholders.”

Awkward years
One possible outcome for the industry longer term is lower management fees. Medley Capital, which has been named as a potential target of activist shareholders, this month unveiled plans to expand a share repurchase program to $50 million after buying back 1.4 million of shares in the most recent quarter, and cut its base management fee on gross assets exceeding $1 billion to 1.5%, from 1.75%, and incentive fees to 17.5%, from 20%.

Medley Capital was part of a trend last year that saw shares of its management company listed in an IPO, following in the footsteps of Ares Management and Fifth Street Asset Management. Medley Management, whose shares trade on NYSE as MDLY, derives most of its revenue from fees for managing BDCs Medley Capital and Sierra Income Corp.

Brian Chase, the CFO of Garrison Capital, said an important factor moving forward is whether a BDC manager also manages other funds, outside of their BDC, that invest in privately originated debt investments. Having access to this institutional capital will be key to staying relevant in the market, particularly in an environment where raising fresh equity is challenging.

Some upsets are possible in the near term due to activist investors’ attention on the BDC sector.

“The BDC space is going through its awkward teenage years. I expect that in due course the sector as a whole will mature and institutionalize, which should further open up access to more capital and solidify their role in the financial system,” said Chase.  — Abby Latour

Follow Abby on Twitter @abbynyhk for middle-market deals, leveraged M&A, BDCs, distressed debt, private equity, and more.

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Congress approves expanded borrowing for managers of SBIC licenses

Congress passed legislation on Friday that expanded borrowing capacity of managers of multiple Small Business Investment Companies (SBICs) licenses to $350 million from $225 million.

Holders of multiple SBIC licenses will have expanded access to low cost SBA debentures, at a rate of just under 3% currently.

One beneficiary is Monroe Capital, holder of three licenses, including through MRCC SBIC which had $40 million in SBA-guaranteed debentures outstanding as of Sept. 30.

“The potential is there for $125 million extra. It’s a game changer for the BDC,” said Monroe Capital CEO Ted Koenig.

Other beneficiaries include Main Street Capital, Capitala Finance, and Triangle Capital.

For an individual SBIC, SBA debenture borrowing is limited at $150 million. This will not change.

The change was passed as part of the Small Business Investment Company (SBIC) Capital Act of 2015, which received bipartisan support because it increased investment in job-creating small business without increasing government spending. The item was part of a fiscal package that Congress passed today granting the government over $1 trillion in spending measures.

SBICs invested over $6 billion in 2015, and account for more than $25 billion in assets across over 240 licensed SBICs, the SBIA said.

“This legislation allows proven SBICs to raise new funds and put capital to use in small businesses,” said Brett Palmer, President of the Small Business Investor Alliance (SBIA).

Other SBIA-backed proposals were part of the package and are now slated to become law. They include permanent extension of withholding exemption for foreign investors in Regulated Investment Companies (RICs), which will encourage long-term investment by foreign investors in BDCs.

In addition, Congress approved permanent extension of 100% capital gains exclusion for qualified small business investment. At the end of 2014, the exclusion was cut to 50%. — Abby Latour

Follow Abby on Twitter @abbynyhk for middle-market deals, leveraged M&A, BDCs, distressed debt, private equity, and more.

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Leveraged Loan Fund Assets Shrink, Again; Down $18B Thru November

 

loan fund assets under management

In November, loan mutual funds’ assets under management fell by $3.8 billion, to a 2.5-year low of $123.24 billion, according to Lipper FMI and fund filings. It was the fourth consecutive monthly decline in AUM and followed October’s $1.6 billion decrease.

Over the first 11 months of 2015, the loan funds category has contracted by $18 billion, or 12.8%. That exceeds that of the year-earlier period when AUM declined $14.8 billion. December 2014, however, was a doozy at negative $9.8 billion (including market value declines). Few are expecting such a big decrease during the final month of 2015. –Steve Miller

Follow Steve on Twitter for an early look at LCD analysis on the leveraged loan market.

This story first appeared on www.lcdcomps.com

 

 

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Oaktree prices $435M CLO via Mitsubishi UFG; YTD US volume: $96.33B

Mitsubishi UFJ today priced a $435.2 million CLO for Oaktree Capital Management, the manager’s third U.S. CLO of the year, according to market sources.

Pricing details for the Oaktree EIF I Series A1 are as follows:

Up to 70% of the loans can be covenant-lite, according to the S&P pre-sale report.

The transaction will close on January 7 when the portfolio is expected to be 95% ramped.

The non-call period will end on January 18, 2018, and reinvestment on January 18, 2019. The final maturity is on October 18, 2027.

Year-to-date, 185 transactions have priced for a total of $96.33 billion, according to LCD data. December’s total is now $5.9 billion from 12 CLOs. — Andrew Park

Follow Andrew on Twitter for CLO market news and analysis. 

This story first appeared on www.lcdcomps.com. Check out LCD for global leveraged loan and high yield bond info.