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LBO Market: Purchase Price Multiples, Equity Contributions Remain High

LBO stats

Leveraged buyouts continue expensive to private equity firms, as purchase price multiples increased from already lofty levels during the first three months of the year. What’s more, sponsors have been required to kick in a substantial equity percentage to get a transaction done, according to S&P Global Market Intelligence LCD.

Market players expect these trends to persist as regulatory pressures and fragile leveraged loan market technical conditions continue to discourage highly geared deals, creating an environment that is more conducive to better-rated transactions from strategic issuers (you can read about strategic vs PE/platform deals here).

This story – along with numerous other charts detailing 1Q U.S. leveraged loan activity – first appeared on www.lcdcomps.com, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.

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S&P: 5 More Corporate Defaults During Week, Bringing YTD Tally to 36

global defaultsThree U.S. corporate debt issuers and two from emerging markets defaulted this week, bringing the total so far in 2016 to 36, compared to 25 at this point last year, according to S&P Global Market Intelligence.

The recent activity keeps the default pace through March 30 as high as it’s been since 2009, when there were more than 50 defaults.

New to the default rolls this week:

  • Foresight Energy
  • Southcross Holdings
  • Nuverra Environment Solutions
  • Mongolian Mining Corp.
  • PDG Realty S.A. Empreendimentos E Participacoes

 

Foresight, Southcross – both energy concerns – and Nuverra are U.S. entities. Overall, U.S. issuers comprise 30 of the 36 global corporate defaults. – Tim Cross

The full analysis is available to S&P Global Credit Portal subscribers here. It includes downloadable xls files detailing the Global Corporate Default Summary, a full list of global corporate defaults year-to-date, as well as data points backing up the above chart.

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S&P: ECB Stimulus to Boost European High Yield Bond Issuance in 2016

The European Central Bank’s March announcement of a new Corporate Securities Purchase Programme (CSPP) — expected to take effect in June — will be a game changer for corporate bond market issuance in Europe over the next few months, including for private equity-owned firms and leveraged corporates, according to S&P.

european leveraged finance volume

In its quarterly leveraged finance report, titled The ECB’s Corporate Buying Program Will Boost European High Yield Bond Issuance In First-Half 2016, S&P says that before the announcement, debt capital markets activity in Europe had been moribund in 2016, and had completely dried up for speculative-grade borrowers.

Inflows into high-yield funds had already begun to improve in early March, and secondary pricing fell to a point where investors started to step back in. These factors helped some well-known and highly rated names to start wading back into primary high-yield, but the ECB’s actions are likely to give the market a real boost, adds the agency.

S&P expects the anticipation of the ECB’s program launch in June will have a beneficial impact on new bond issuance, as spreads will tighten across the credit curve. This will likely lead to an increase in refinancing and recapitalization activity, as well as greater debt-funded merger and acquisition financing for corporates and private equity, it adds.

The risk from a credit perspective is that this scenario could lead to more shareholder-friendly activities — something that S&P says it will continue to monitor closely and flag to the market.

The report, which was published today on RatingsDirect, also discusses how the leveraged loan market stayed open throughout the months that were difficult for public bond issuance. Most of the deal flow came from LBOs and particularly smaller transactions, according to S&P. The rating agency also notes that borrowers active in the market used deal structures that show a reversion to the typical pre-crisis structure for leveraged buyouts, of senior secured loan lending with an accompanying revolving credit facility.

S&P anticipates that the current public debt market conditions will remain volatile throughout the year, leading to stops and starts in deal flow volume as borrowers take advantage of windows of opportunity to issue. Markets will remain vulnerable to disruption from overall volatility, including from idiosyncratic political risk, such as the U.K. referendum on whether to leave the EU, and the U.S. elections, the agency adds. — Staff reports

The report is available to subscribers of RatingsDirect at www.globalcreditportal.com and at www.spcapitaliq.com. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-7280 or sending an e-mail to[email protected].

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US Leveraged Loans Gain 0.05% today; YTD Return: 1.49%

Loans gained 0.05% 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, lost 0.06% today.

In the year to date, loans overall have gained 1.49%.


This story first appeared on www.lcdcomps.com, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.

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Resolute Energy Cuts Revolver Loan Borrowing Base to $105M

Resolute Energy disclosed that it has reduced the size of its revolver’s borrowing base by $60 million, to $105 million. Note that the company in October 2015 cut its borrowing base to $165 million, from $260 million. And in January 2015, the company reduced the borrowing base by $10 million, to $260 million.

In the secondary high-yield market, the company’s sole outstanding corporate—a $400 million issue of 8.5% notes due 2020—hasn’t traded since Monday in one large block at 31, trade data show. The C/Ca paper has been sub-50 all year, was around 60 a year ago, and traded in odd-lot lows at 25 two weeks ago.

Pricing on the revolver due March 2018 is tied to a utilization-based grid, at L+150–250.

Wells Fargo and BMO Capital acted as joint lead arrangers on the revolver. Wells Fargo is administrative agent. Barclays, U.S. Bank, MUFG Union Bank, Capitol One, Comerica, SunTrust Robinson Humphrey, ING Capital, KeyBank, Associated Bank, Cadence Bank, and Guaranty Bank and Trust also participated in the revolver.

The revolver is covered by a leverage covenant set at 3.5x.

On March 8, Standard & Poor’s downgraded Resolute’s corporate credit rating to CCC–, from CCC, with a negative outlook, following Resolute’s announcement that it could pursue a debt restructuring. Denver-based Resolute, meanwhile, is rated Caa3 by Moody’s. — Richard Kellerhals/Matt Fuller

This story first appeared on www.lcdcomps.com, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here

Check out LCD News, LCD’s subscription service, for full leveraged loan/high yield bond coverage.

 

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Loan bids ease slightly amid slight change to sample

The average bid of LCD’s flow-name composite eased five basis points in today’s reading, to 98.43% of par, from the prior reading of 98.48 on March 24.

Note that with today’s reading, there is a slight change to the sample. First Data’s term loan due March 2021 (L+400) replaces the issuer’s term loan due March 2018 (L+350), as the latter is being taken out via an extension and a partial paydown from a recent high-yield issue. The change has virtually no impact on the average bid price—the 2021 paper is bid at 99.75, versus 99.875 on the 2018 loan in Thursday’s reading—though the higher coupon helped push up the spread to maturity implied by the average bid to L+396, from L+392 on Thursday.

Among the other 14 names in the sample, one loan advanced, six loans declined, and seven loans were unchanged from the prior reading. Note, however, that no loan moved more than a quarter-point in either direction.

As this suggests, prices have leveled off in recent days, though activity has been muted given the long holiday weekend. While many names have limited, if any, upside potential left—11 of the 15 names are bid at 99 or higher following the market’s fantastic run-up that has pushed the average flow-name bid up 288 bps from its year-to-date low of 95.55—many market participants have shifted their gaze from the picked-over secondary to the new-issue market, which has livened up with the significant improvement in the secondary.

With the average loan bid slipping five basis points, the average spread to maturity edged up five basis points, to L+396.

By ratings, here’s how bids and the discounted spreads stand:

99.35/L+378 to a four-year call for the ten flow names rated B+ or higher by S&P or Moody’s; STM in this category is L+373.
95.88/L+481 for the five loans rated B or lower by one of the agencies; STM in this category is L+460.

Loans vs. bonds
The average bid of LCD’s flow-name high-yield bonds decreased 75 bps, to 93.07% of par, yielding 8.41%, from 93.82 on March 24. The gap between the bond yield and discounted loan yield to maturity stands at 412 bps. — Staff reports

To-date numbers

March: The average flow-name loan jumped 276 bps from the final February reading of 95.67.
Year to date: The average flow-name loan gained 126 bps from the first 2016 reading of 97.17.

Loan data

Bids lower: The average bid of the 15 flow names dropped five basis points, to 98.43% of par.
Bid/ask spreads fall: The average bid/ask spread tightened two basis points, to 42 bps.
Spreads increase: The average spread to maturity—based on axe levels and stated amortization schedules—rose five basis points, to L+396.

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TruGreen Launches $560M Leveraged Loan Backing Scotts Merger

Arrangers J.P. Morgan, Credit Suisse, ING, Natixis, Rabobank, and Goldman Sachs earlier today launched their first-lien financing backing the merger of Clayton Dubilier & Rice–controlled TruGreen with Scotts Miracle-Gro Co.’s Scotts LawnService business, setting price talk on the term loan of L+575, with a 1% LIBOR floor, offered at 98-98.5, sources said.

The financing includes a $560 million B term loan and a $146 million revolving credit. A $200 million second-lien term loan has been placed privately and carries a 12% coupon, sources said. The first-lien term loan includes six months of 101 soft call protection and would yield roughly 7.22–7.32% to maturity.

The RC will be governed by a springing maximum first-lien test of 5.25x that will step down to 5x for the quarter ended Dec. 31, 2016, and will become effective when revolver utilization is 30%, according to Standard & Poor’s.

According to published reports, Scotts Miracle-Gro would receive $200 million in cash as it adds the Scotts LawnService business to the joint venture, taking a 30% stake. The combined company would operate under the TruGreen name, sources said.

Commitments are due on April 8.

TruGreen was spun off from CD&R-owned ServiceMaster in early 2014, using a restricted-payments basket in ServiceMaster’s credit agreement that, in effect, allowed CD&R to take the asset as a dividend. At the time, TruGreen had been underperforming and was seen as a potential stumbling block to ServiceMaster’s planned initial public offering.

A thorough process—including a solvency opinion and capital surplus analysis—showed that a spin-off was in the company’s best interests. The company’s capital surplus was adequate to make the planned distribution, and leverage would stay at 7.6x after a spin-off, the company said at the time. An analysis for the board valued TruGreen as a dividend at $399 million, the high end of a $352–402 million valuation range of a financial advisor, and within a $484 million term loan restricted payment threshold. The restricted-payment threshold for the distribution under indentures for 7% and 8% notes is $549 million.

Now, TruGreen is valued at $815 million in the transaction as CD&R sells the company out of one of its funds and reinvests into a newer fund, according to sources. TruGreen is rated B/B2. The first-lien loan is rated B/B1, with a 3H recovery rating. —Chris Donnelly

This story first appeared on www.lcdcomps.com, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.

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Oil Co. W&T Offshore Cuts Leveraged Loan Borrowing Base to $150M

W&T Offshore disclosed that it has reduced the borrowing base under its revolving credit to $150 million, from $350 million.

In February, the independent oil and gas company drew $340 million under the leveraged loan due November 2018. However, now the company has borrowing of $191 million in excess of the redetermined borrowing base, which is required to be repaid in three equal monthly installments.

W&T currently has a cash balance of $431 million.

Pricing on the revolver ranges from L+225–325.

As reported, Standard & Poor’s in February lowered its corporate credit rating on W&T to CCC–, from B–, following the company’s announcement that it had drawn down nearly the maximum amount available under the credit facility and hired legal and financial advisors. At the same time, S&P lowered its issue-level rating on the company’s secured debt to CCC+, from B+, and its issue-level rating on to cure potential borrowing-base deficiencies or covenant breaches in 2016.

And last week, Moody’s downgraded W&T’s corporate rating to Caa3, from B3, with a negative outlook, citing weak cash flow metrics that will likely deteriorate further due to subdued commodity prices.

W&T is based in Houston. — Richard Kellerhals/Rachelle Kakouris

This story first appeared on www.lcdcomps.com, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here

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After 32 Weeks of Outflows, Leveraged Loan Funds See 3rd Straight Cash Inflow

us loan fund flows

U.S. leveraged loan funds saw a net inflow for the third consecutive reading, at $126 million for the week ended March 23, according to Lipper. That’s down from positive $176 million last week, but up from positive $55 million two weeks ago, which itself ended a 32-week outflow streak totaling $17.6 billion over that span.

Take note, however, that today’s positive reading was essentially all tied to inflows to the ETF space, at $120 million, or 95% of the total. Last week’s reading was similar, at 81% of the total to ETFs, while two weeks ago there were $41 million of mutual fund outflows along with $97 million of ETF inflows.

Regardless of what that might suggest about fast money, market timing, and hedging strategies, this past week’s observation is a third net positive that boosts the trailing four-week average into the black for the first time in 34 weeks. It’s just $203,000, however, but reflects a big change from negative $186 million last week and negative $391 million two weeks ago.

Year-to-date outflows from leveraged loan funds are essentially steady at $4.7 billion, with just 1% ETF-related. A year ago at this juncture, it was mostly all mutual fund outflows, at $3.4 billion, with a small contribution of negative $180 million from ETFs, or 5% of the total redemption.

The change due to market conditions this past week was for a second week fairly robust, at positive $291 million amid the better market conditions, for a 0.5% gain on total assets, which were $58.2 billion at the end of the observation period, with ETFs representing 10% of the total, at $5.6 billion. — Matt Fuller

Follow Matthew on Twitter @mfuller2009 for leveraged debt deal-flow, fund-flow, trading new, and more.

This story first appeared on www.lcdcomps.com, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here

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Quorum Health Preps $880M Leveraged Loan Backing Spin-Off

An arranger group led by Credit Suisse plans to launch on Tuesday, March 29, at 1 p.m. EDT, an $880 million term loan B forQuorum Health Corp., backing its spin-off from Community Health Systems, sources said. The issuer also will put in place a $100 million, five-year revolver. The six-year TLB is talked at L+500–525 with a 1% LIBOR floor, and is offered at 98.5.

The term loan includes six months of 101 soft call protection. Commitments will be due on Friday, April 8. At current guidance the loan would yield roughly 66.73-6.99% to maturity.

In addition to Credit Suisse, underwriters include UBS, Bank of America Merrill Lynch, Citigroup, J.P. Morgan, Wells Fargo, RBC Capital Markets, and SunTrust Robinson Humphrey.

The loan is expected to carry a net secured leverage covenant. The issuer also is expected to tap the bond market for $400 million. The issuer is rated B/B2, while the term loan is rated B/B1, with a 3H recovery rating.

Based on its preliminary assessment of its results of operations, QHC expects net operating revenues for the year ending Dec, 31, 2016, to range from $2.2–2.3 billion, and expects adjusted EBITDA for the year ending December 31, 2016, to range from $265–$275 million.

As previously disclosed, on Aug. 3, 2015, CHS announced its plans to form Quorum Health by spinning off to its stockholders a group of 38 hospitals and Quorum Health Resources, LLC, a hospital management advisory and consulting business. The spin-off is intended to be tax-free to CHS and its stockholders and is expected to close during the second quarter of 2016. QHC will be an independent, publicly traded company and its common stock has been authorized for listing on the New York Stock Exchange under the symbol QHC. — Chris Donnelly

This story first appeared on www.lcdcomps.com, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.