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Europe: Yields on Single-B Loans Fall to Record Lows

europe single b loan yields

The rolling three-month average new-issue yield for single-B institutional loans in the European leveraged loan market has hit a record low, standing at just 4.01% as of May 25, according to LCD.

During May alone, yields for single-B transactions ground even tighter, hitting just 3.68% over the month (to May 25), although this reading is from a far smaller sample of deals, with just 10 transactions of this rating completed over the month.

Single-B borrowers are one the lower-rated, riskier tiers of the leveraged loan issuer base. – Nina Flitman/David Cox

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This story is taken from analysis which 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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Negative Earnings Growth for US Leveraged Loan Issuers; First Time Since 2009

quarterly EBITDA growth loan issuers

Downshifting profit growth in 2016 reached stall speed for leveraged loan issuers early this year, putting pressure on credit metrics at a time when market participants are increasingly alert to signals of a developing negative inflection for the credit cycle.

First-quarter earnings for S&P/LSTA Leveraged Loan Index issuers that publicly file financial results revealed the first negative year-on-year aggregate reading for EBITDA since recession dynamics settled over the global economy during the first half of 2009, according to LCD.

quarterly EBITDA growth energy loan issuers

The first-quarter results were far from uniformly doom-and-gloom, however, as the negative 1.25% reading for 1Q EBITDA was net of noisy and wide-ranging results, by sector basket.

Even so, the readings were slightly negative on net (negative 1%) when stripping out volatile oil and gas inputs from the sample, and included more dour results from retail and media credits, where distress ratios have disproportionately climbed over the last year ($$).

High-level commentary from speakers at the Milken Institute Global Conference earlier this month generally keyed on the notion that profit growth—while below the heights recorded during the recovery period over the first half of this decade—would likely prove resilient over the quarters ahead, given relative strength in credit metrics now, versus at the same point in prior credit cycles, bolstered by still-accommodative—if tightening—monetary policy.

Indeed, S&P Global’s Bob Keiser notes that corporate America writ large posted a smart 15% year-to-year increase in first-quarter earnings across the S&P 500, and projections suggest continued growth into 2018. But this sample prominently includes results from oil-and-gas players, many of which reported big year-to-year improvements on the bottom line in 1Q17 amid more stable commodity-price progressions, relative to the desperately weak comparisons from 1Q16.

When stepping back from the oil story, the slip in profits to start 2017 extends a bright-line trend for loan issuers. The negative first-quarter print across the S&P/LSTA Index, compared with 7.1% growth in the first quarter of last year and 4–6% growth rates over the last three quarters of 2016, marks a steady deceleration from quarter averages of 7% in 2015, 9% in 2014, and 13% over the recovery period from 2010–2013.

Flow-of-funds analysis ($$) by S&P Global for the concluding quarter of 2016 had already showcased a glaring jump in the financing gap for U.S. companies (the difference between capital spending and what is covered by internal cash generation), as a nascent uptick in capital spending—in part due to O&G credits increasing their outlays as commodity prices stabilized—dovetailed with tumbling profit growth.

outer edge credit statistics

A high financing gap is unsustainable without a pullback in spending or a substantial increase in borrowing, which may put leverage trends for some of the more at-risk loan issuers under a harsh spotlight in a low- or negative-growth environment for earnings. Indeed, issuers with “outer-edge” debt/EBITDA ratios of greater than 7x swelled to 22.56% of the sample in the latest quarter, up more than four percentage points from 4Q16 and versus 21.15% a year earlier, marking the highest proportion since 4Q14. – John Atkins

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This story is taken from analysis which 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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28 Weeks, and Counting: US Leveraged Loan Funds See $274M Cash Inflow

U.S. loan funds recorded an inflow of $274 million for the week ended May 24, according to Lipper weekly reporters only. This marks the twenty-eighth consecutive inflow since the week ended Nov. 16, for a total of $21.9 billion over that span.

US fund flowsYear-to-date inflows to leveraged loan funds now total just over $14 billion, based on inflows of roughly $10.1 billion to mutual funds and $3.9 billion to ETFs, according to Lipper.

Note the rate of inflows has been slowing of late, with an average weekly inflow of $237 million over the past four weeks comparing with an average of $781 million over the 28-week positive streak.

Mutual funds made up $194 million of the total inflow this week, with $80 million flowing into ETFs.

The change due to market conditions this past week was positive $12 million, marking the fifth straight week of increases. Total assets were $95 billion at the end of the observation period. ETFs represent about 19.3% of the total, at $18.4 billion. — James Passeri

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Another Month of Growth for US Leveraged Loan Funds

us loan fund AUM

U.S. loan fund assets under management grew for the tenth straight month in April, gaining $3 billion, for a total of $152 billion, according to Lipper and LCD.

While that’s an impressive run by any account—the AUM figure is the highest it’s been since October 2014—April’s growth was the slightest for the asset class since October 2016. And AUM gains have decreased for four consecutive months since the $9.5 billion windfall in December, offering yet another sign that the pronounced issuers’ market of the last few months looks to be easing, at least somewhat.

us loan fund AUM growth

This downshift comes as institutional investors continue to view the asset class more deliberately than they had earlier in the year, what with the outlook regarding additional rate hikes in greater flux and the prospects of market-friendly Trump administration policies seeming more tenuous now than during the administration’s first 100 days. – Tim Cross

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Leveraged Loans: Amid Demand, Second-Lien Issuance Grows, Yields Dip

second lien loan issuance

As institutional lenders continue their search for higher-yielding assets, second-lien loan issuance in the U.S. has surged over the past few quarters, reaching $7.12 billion during the first three months of 2017, according to LCD. That’s the most since the fourth quarter of 2014 ($12.55 billion).

And despite the increased amount of second-lien loan paper available investors, supply is no match for market demand. New-issue yields on these riskier debt tranches have eroded, from more than 11% in the second quarter of 2016 – when investor cash had been flowing out of the loan market – to 9.58% in 1Q 2017 (it has since ticked up to 9.96%, as the U.S. market has cooled a bit lately).

Second lien loan yield

As their name implies, second-lien loans reside further down a company’s capital structure than does more senior debt, meaning second-lien lenders are repaid after first-lien lenders are repaid. Because of the additional risk, second-lien loans are more richly priced than first-lien debt.

You can read more about how second-lien loans work, and the loan market in general, in LCD’s online Loan Primer.

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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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BlueMountain Fuji Sets $509M CLO

J.P. Morgan on Thursday priced a $509.75 million CLO from BlueMountain Fuji Management LLC, according to market sources. BlueMountain Capital Management acts as the services provider to the manager.

The transaction is structured to be compliant with risk retention in the U.S. with the manager retaining a horizontal slice, as well as in Europe via the originator route.

Pricing details are as follows:

The transaction will settle on June 22, with the non-call period running until July 20, 2019, and the reinvestment period ending on July 20, 2022. The legal final maturity is on July 20, 2029.

Year-to-date issuance is now $35.19 billion from 64 CLOs, according to LCD data. This is the fifteenth new issue in May for a total of $7.56 billion. — Andrew Park

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Leveraged Loans: Covenant-Lite Structure Gains Ground in Middle Market

middle market cov-lite loans

Covenant-lite structures, long common among larger loans that are broadly syndicated to institutional investors, are increasingly finding their way into smaller transactions.

An imbalance between supply and demand leveraged loan paper, stoked by fundraising for higher-yielding middle market credits, is behind the expansion of borrower-friendly features.

So far in 2017, the share of covenant-lite deals with debt totaling less than $250 million has climbed to 27%, from 11% in 2016. The share this year is roughly on par with that in 2015, LCD data shows.

Among covenant-lite deals now in market is a $200 million loan backing lift-truck manufacturer Hyster-Yale Group. Pricing on the loan, which was initially brought to market at L+425–450, at a 99 original-issue discount, was tightened due to investor demand, to L+400, at 99.75.

Covenant-lite loans are credits that feature bond-like incurrence covenants, as opposed to more restrictive maintenance covenants (you can read more about how cov-lite loans work here).

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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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Amid Cash Inflows, New Issues, Global Leveraged Loan Mart Tops $1 Trillion

global leveraged loan market

The combined U.S. and European leveraged loan markets hit a notable milestone recently, topping $1 trillion in size, according to LCD.

The boom in market growth comes as institutional investors continue to pour money into  loan funds and ETFs – particularly in the U.S. – amid impressive issuance over the past few quarters.

In the U.S., leveraged loan outstandings hit $897 billion at the end of April, the most ever. They have been growing steadily since last October, amid inflows of cash into the leveraged loan asset class amid interest rate hike expectations.

In the European loan market, loan outstandings totaled €120 billion at the end of April. That market has been growing, as well.

U.S. leveraged loan market outstandings are tracked via the S&P/LSTA Loan Index while European outstandings are per S&P European Leveraged Loan Index.

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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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Leveraged Loans: As Cash Inflows Ease, Issuer-Friendly Market Trends Toward Equilibrium

leveraged loan supply shortage

The U.S. leveraged loan market, which saw booming activity in the first quarter of 2017, as issuers took advantage of huge investor cash inflows to market, is showing signs of cooling.

The amount by which the supply of deals available in market was outweighed by investor demand for that paper dipped to $5.6 billion in April, according to LCD. While that’s still a considerable amount, this is the third straight month that demand has eased (albeit from a whopping $14.2 billion in January).

Any market rebalance would be welcome by institutional investors, who have been under siege this year from leveraged loan issuers looking to cut interest rates on existing deals (sometimes on credits put in place only months ago). Indeed, repricing activity topped an astronomical $100 billion in January

Why the demand surge? Since the third quarter of 2016 investors have been pouring cash into U.S. loan funds and ETFs amid expectations of regular interest rate hikes, finally, in 2017 (of course, as rates rise, floating-rate asset classes such as leveraged loans tend to fare well).

Lately, however, those cash inflows to market have slowed as a second – and especially third – rate hike in 2017 look less of a sure thing than they did earlier this year due to a recent dip in inflation and inflation expectations. – Staff reports

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Investor Cash to US Leveraged Loan Funds Picks Up Steam; Streak at 27 Weeks

US loan fund flows

U.S. loan funds recorded an inflow of $332 million for the week ended May 17, according to Lipper weekly reporters only. This marks the twenty-seventh consecutive inflow since the week ended Nov. 16, for a total of $21.6 billion over that span.

Mutual funds made up the bulk of this week’s haul, pulling in $225 million while $107 million flowed into ETFs.

The four-week trailing average climbed moderately, rising to positive $262 million, from $221 million last week.

Year-to-date inflows from leveraged loan funds now total $13.8 billion, based on inflows of $9.9 billion to mutual funds and inflows of $3.8 billion to ETFs, according to Lipper.

Total assets were $96.4 billion at the end of the observation period, reaching the highest level since November 2014. ETFs represent about 19% of the total, at $18.3 billion.

The change due to market conditions this past week was positive $25 million, marking the fourth consecutive week of increases. — James Passeri

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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.