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Late to party, Bain targets global middle market strategy for BDC

While no stranger to lending to middle market companies, Bain Capital is a latecomer to the BDC party. Other asset investment firms of its size embraced the structure years ago.

A combination of demand from institutional investors and lessons learned from the lenders that came and went during the credit crisis motivated the wait.

“We haven’t gone for explosive growth,” said Michael Ewald.

Calls for a BDC’s advantageous structure led to the SEC filing of the registration statement for Bain Capital Specialty Finance on Oct. 6. The BDC will invest in middle market companies generating $10 million–150 million in annual earnings, with ones that generate $20–75 million in EBITDA the primary target.

Ones smaller than those, generating $10–20 million in earnings, generally have very health relationships with regional banks, so lending to them is more competitive.

Bain plans to differentiate themselves from the crowded playing field of BDCs that lend to middle market companies by investment choices made for the 30% of assets in non-qualifying investments. Here, Bain aims to target European and Australian companies.

The credit originations team under Ewald reflects this: staff in Melbourne is increasing to four from three, seven people are based in London, and the rest are in New York, Boston, and Chicago.

The previous name of the entity is Sankaty Capital Corp, the filing showed. The BDC will be externally managed by Bain professionals through BCSF Advisors. The BDC’s board consists of David Fubini, Thomas Hough, and Jay Margolis. Investment decisions are made by the committee that governs other Bain Funds, and consists of Jonathan Lavine, Tim Barns, Stuart Davies, Jonathan DeSimone, Alon Avner, Michael Ewald, Christopher Linneman, and Jeff Robinson.

Investor capital at Bain has previously had exposure to the middle market lending asset class through other funds, including a dedicated $400 million direct lending fund raised at the start of 2015. In addition, Bain is currently investing from a $1.5 billion fund targeting junior debt investments at middle market companies, with another $3.5–4 billion targeting senior debt of middle market companies through others types of funds and managed accounts.

The BDC has been investing for about three weeks, and is expected to ramp up fully over one year. Excluding leverage, the size is $546 million. The private BDC has a 3-1/2 year investment period, after which it will be wound down, unless it is listed publicly before then.

Many BDCs in recent years have struggled with shares trading below net asset value, marring fundraising efforts through share sales. Before then, the BDC would need to be fully invested, and grow more, with at least $750 million in equity.

Per Ewald, “There’s potential to take it public, but we’ll figure that out when the time’s appropriate. There haven’t been a lot of BDC IPOs lately, so that might be the bigger news story.” — Abby Latour

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This story first appeared on www.lcdcomps.com, an offering of S&P Global Market Intelligence. LCD’s subscription site offers 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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US Leveraged Loan Funds See 13th Straight Week of Cash Inflows

US loan funds

U.S. leveraged loan funds recorded an inflow of $290.6 million in the week ended Oct. 26, according to the Lipper weekly reporters only. This is off the recent pace, down from $514.8 million last week, but it extends the inflow streak to 13 weeks and tops the weekly average during that time of $286 million.

The total inflow during this current streak is $3.72 billion.

The four-week trailing average dropped to positive $413.2 million, from $460.7 million last week.

ETF flows were positive, at $43.7 million, or 15% of the total, which is the lowest rate amid this current win streak.

Year-to-date outflows from leveraged loan funds total $1.67 billion, based on outflows of $4.02 billion from mutual funds against inflows of $2.35 billion to ETFs, according to Lipper.

The change due to market conditions this past week was positive $72.2 million, or 0.11% of total assets. Total assets were $70.75 billion at the end of the observation period. ETFs represent about 16% of the total, at $11.5 billion. — Jon Hemingway

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With Another Uptick Today, US YTD Leveraged Loan Returns Hit 8.56%

Loans gained 0.01% today after gaining 0.04% 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 0.01% today.

In the year to date, loans overall have gained 8.56%.

A full xls of the Daily Index is attached is available to LCD News subscribers. 

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Leveraged Loans: As Investors Pour Cash into Market Demand Swamps Supply

loan technicals

The U.S. leveraged loan market continued to favor issuers in September, with demand for paper topping supply by $9.1 billion, according to LCD. While that’s down from the whopping $12.1 billion imbalance in August it’s up from a still-hefty $6.5 billion in July.

As a result of this three-month technical tilt, the September loan market was set firmly in overdrive, leading to outsized activity across many corners of the asset class, including institutional issuance (which hit a record high), high-yielding recap/dividend deals (the $6.9 billion in September was the most since July 2015), and even CLOs, a crucial leveraged loan investor constituency that has been largely dormant for much of 2016.

Why the supply/demand imbalance? Investors hungry for yield – and paper – have been pouring cash into U.S. loan funds, and CLO issuance had its busiest month of the year, as that market looks to price deals before new regulations hit at year-end. – Tim Cross

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Amid Investor Demand, Second-Lien Leveraged Loan Issuance Takes Off

secon-lien issuance

With a loan primary market in overdrive over the past seven weeks there has been a resurgence of broadly syndicated second-lien tranches. Arrangers brought to market $2 billion of second-lien term loans in September, the most since July 2015, with another $2.2 billion already in October, according to LCD.

For the record, that is the heaviest two-month stretch since September/October of 2014 ($4.9 billion). You can read more about how second-lien loans work here.

The reemergence of syndicated second-liens gained momentum amid much-improved market conditions for new issues in recent months, which spurred a surge in overall activity: September saw the highest monthly institutional volume on record, at $60.4 billion, according to LCD.

There is plenty of liquidity in the loan market. Mutual fund flows have been on a tear since August, with Lipper reporting 12 straight weeks of inflows into the asset class, for a total of $3.4 billion from weekly reporters only. That’s the longest win streak since 2014’s first quarter. – Jon Heminway

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Top Leveraged Finance Links – Oct. 24, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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AT&T Nets $40B Bridge Loan Backing $85.4B Time Warner Buy

AT&T disclosed that it has obtained a $40 billion term loan credit agreement from J.P. Morgan and Bank of America Merrill Lynch in connection with its planned $85.4 billion acquisition of Time Warner.

Pricing on the bridge loan is tied to a ratings-based grid, at L+75–150. Based on AT&T’s BBB+/Baa1 rating, pricing would appear to open at L+112.5.

AT&T logoJ.P. Morgan and Bank of America acted as joint lead arrangers and lenders. J.P. Morgan is administrative agent.

The bridge loan is covered by a net debt leverage covenant set at 3.5x.

In addition to new debt, the acquisition will be funded with cash on AT&T’s balance sheet.

Bonds backing AT&T and Time Warner Inc. widened on Friday as participants anticipated the formal merger announcement. AT&T 4.75% bonds (BBB+/Baa1) due May 15, 2046, which date to issuance in April 2015 at T+215, changed hands 25–30 bps wider at G-Spreads in the low-to-mid 220 bps range, and continued trade in that area this morning, according to MarketAxess.

Time Warner 4.85% bonds (BBB/Baa2) due July 15, 2045—which were first printed in May 2015 at T+195, and reopened last November at T+200, or 5.06%—traded on Friday at G-Spreads in the low 200 bps area, or 20 bps wider on the day and month to month, and were indicated in that area again this morning, trade data show.

AT&T’s market capitalization was recently roughly $238 billion and its total enterprise value roughly $362 billion, including $7.3 billion of cash and $131 billion of total debt, according to S&P Global Market Intelligence. Time Warner had a $64.5 billion market cap and $86.5 billion total enterprise value, including $2.5 billion of cash and short-term investments and $24.5 billion of total debt.

While bond spreads widened, CDS indications went in different directions. AT&T five-year protection costs on Friday increased 7% to the 95-bps area, and continued up this morning to test 100 bps, while Time Warner costs ebbed 9% to just under 60 bps on Friday and continued a further 0.5 bps tighter this morning.

The acquisition is expected to close before year-end 2017. By the end of the first year after closing, AT&T expects net leverage to be in the 2.5x range.

AT&T (NYSE: T) on Oct. 22 announced that third-quarter 2016 net income totaled $3.3 billion, compared to $3 billion in the third quarter of 2015. — Richard Kellerhals/John Atkins

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Investors Continue to Pour Cash into US Loan Funds: $515M This Week

U.S. leveraged loan funds recorded an inflow of $514.8 million in the week ended Oct. 19, according to the Lipper weekly reporters only. This is the strongest one-week inflow since April 15, 2015 and runs the current inflow streak to 12 weeks for a total of $3.23 billion over that span.

US loan fund flowsThis week’s result raises the four-week trailing average to positive $460.7 million, from $411.6 million last week.

ETFs accounted for 55%, or $284 million, of the total inflow this week.

Year-to-date outflows from leveraged loan funds now total $1.96 billion, based on outflows of $4.27 billion from mutual funds against inflows of $2.31 billion to ETFs, according to Lipper.

The change due to market conditions this past week was positive $142 million, or 0.21% of total assets. Total assets were $67.1 billion at the end of the observation period. ETFs represent about 12% of the total, at $8.22 billion. — Jon Hemingway

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This story first appeared on www.lcdcomps.com, an offering of S&P Global Market Intelligence. LCD’s subscription site offers 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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Fridson: The Incredible Expanding High-Yield Overvaluation

Only on the brink of the massive price collapse of the Great Recession in 2008 has the high-yield market ever been as overvalued as it currently is, according to our Fair Value Model.

As of Sept. 30, the option-adjusted spread (OAS) on the BofA Merrill Lynch US High Yield Index was 497 bps. That amounted to a gap of negative 265 bps versus our fair value estimate of 762 bps, a difference of –2.1 standard deviations, where one standard deviation equals 126.3 bps. (Grantham, Mayo, Van Otterloo has proposed a general definition of a bubble in financial markets as a divergence of –2 standard deviations from intrinsic value.)

By Oct. 14, the OAS on the BAML High Yield Index was down to 472 bps, a gap of –290 bps or –2.3 standard deviations.
fridson spread

As detailed above, the present shortfall from fair value was greater only in April 2008 (–300 bps or –2.4 standard deviations) and May 2008 (–321 bps or –2.5 standard deviations).

Following the record overvaluation of the spring of 2008, the high-yield market did not return to fair value until October 2008, when the BAML High Yield Index’s OAS widened by an astounding 521 bps in a single month. Ominously, from April 30 to Oct. 31, 2008, the BAML High Yield Index returned –25.94% while the BofA Merrill Lynch US Treasury Index returned 1.79%. We do not foresee conditions comparable to those of 2008 any time soon, but high-yield’s currently extreme overvaluation nevertheless sounds a loud cautionary note.

By way of background, our basis for determining whether the U.S. high-yield market is fairly valued is the methodology introduced in “Determining fair value for the high-yield market.” We are now using an updated analysis to reflect revisions to originally reported economic data, based on a historical observation period of December 1996 to December 2012. – Martin Fridson

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This story is part of Marty’s weekly high yield analysis, available to subscribers at www.lcdcomps.com, an offering of S&P Global Market Intelligence. LCD’s subscription site offers 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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NewStar Prices $506M Middle Market CLO; YTD Issuance: $49.71B

Citi today priced a $505.5 million middle market CLO for NewStar Financial, according to market sources. This is the manager’s second middle market CLO of the year.

The transaction is structured to be compliant with risk retention in Europe, with the manager retaining a horizontal slice.

Pricing details are as follows, with the CLO upsized from its originally marketed size of $405.2 million:

The transaction will close on November 29 with the non-call period running until October 25, 2018, and reinvestment period ending on October 25, 2020. A weighted average life (WAL) test will also end on November 29, 2024. The legal final maturity is October 25, 2028.

Year-to-date issuance is now $49.71 billion from 110 transactions, according to LCD data. October issuance is now $3.63 billion from seven CLOs. Andrew Park

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