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At Long Last, US Leveraged Loan ‘Supply’ Tops Investor Demand

loan supply demand chart

For the first time in 16 months, the supply of U.S. leveraged loans will outpace investor demand, and in a big way.

Subtracting loan fund flows and CLO issuance (LCD’s proxy for demand) from the net change in loan outstandings per the S&P/LSTA Index (our proxy for supply), the market saw a whopping $22 billion supply surplus in June.

This is, of course, a dramatic turnaround from the shortage of paper that has characterized the loan market since 2Q16. That shortage was as deep as $14 billion in January of this year and has averaged a withering $6.3 billion over the prior 15 months. – Marina Lukatsky

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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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US Leveraged Loans Returns: – 0.10% MTD, +1.85% YTD

daily loan index 6.28.17

Loans gained 0.01% today after gaining 0.01% yesterday, according to the S&P/LSTA Leveraged Loan Index.

The S&P/LSTA US Leveraged Loan 100, which tracks the 100 largest loans in the broader Index, lost 0.02% today.

Loan returns are –0.10% in the month to date and 1.85% in the YTD.

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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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CLO Share of US Leveraged Loan Mart Hits Post-Crisis High

CLO loan market share

Collateralized loan obligation vehicles, always a critical investor component of the steadily growing U.S. leveraged loan market, now account for a whopping 65% of the asset class, according to LCD. That’s the most since way back in 2002, when both the loan market and CLO investor universe were much smaller than they are today.

CLOs are special-purpose finance vehicles set up to hold and manage pools of leveraged loans. You can read more about how they work here.

US CLO issuance

One factor behind the rising CLO market share in 2017’s second quarter: CLO volume has rebounded smartly, with $28.8 billion of new issuance in the quarter, according to LCD. CLO volume has been trending higher since 1Q16, when volume was a mere $8.2 billion.

Through June 16 it has already been the busiest quarter for CLOs since $29.2 billion was issued in 2Q15, a stat that is all the more impressive considering the refinancing/reset wave that has swamped the U.S. CLO market of late.

us leveraged loan outstandings

An illustration of just how big the CLO market has become in the U.S.: Leveraged loan outstandings per the S&P/LSTA Loan Index, the industry proxy for size of the asset class, hit a record $909 billion in May. – Staff reports

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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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US Leveraged Loan Issuance Hits Record $294B in 1H17

US leveraged loan issuance

Bolstered by an unyielding flow of investor cash into the asset class, U.S. leveraged loan issuance hit a dizzying $294 billion in 2017’s first half, according to LCD. That’s the most ever, including the go-go period of 2007 – the previous first-half record – right before the financial crisis.

The first six months of this year was an issuer’s market, to be sure, as borrowers made repeated runs at an unswervingly accommodating investor base, which has spent what seems like forever in an exhausting, frustrating search for yield (it’s been the better part of three quarters, actually).

Indeed, demand for loan paper was so intense this year that repricing activity – where an issuer simply returns to market to obtain more favorable borrowing costs on an existing credit, as opposed to undertaking a new loan agreement proper – hit a surreal $346 billion in the first half, dwarfing activity in prior periods.

(To illustrate just how voracious investor appetite was during the first six months of 2017, the bulk of the repricing activity is not included in the above chart, as it did not entail a syndications process proper).

us loan fund flows

Why was the U.S. market so busy? Because of anticipation of interest rate hikes, institutional investors continued to pour money into the asset class; there has been a roughly $14.4 billion net inflow so far this year, according to Lipper.

A floating rate asset class such as leveraged loans tends to attract investors when the outlook is for a rising rate environment (as the interest rate on loans rises and falls, along with LIBOR).

Those cash inflows are starting to ease, finally – indeed, there were even net outflows recently – as a third Fed rate hike in 2017 looks less like a sure bet and as inflation indicators waver a bit (floating rate asset classes also thrive amid expectations of inflation). – Tim Cross

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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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US Leveraged Loan Funds See $150M Cash Withdrawal

U.S. loan funds recorded an outflow of $149.7 million for the week ended June 21, according to Lipper weekly reporters only. It’s just the second outflow of the year and the largest since June 29 of last year.

ETFs drove the outflow at negative $137.7 million, compared to just $12 million that left mutual funds.

US loan fundsWith the negative reading, the four-week trailing average sinks to its lowest level since August of last year, at positive $78 million, from positive $184 million last week.

Year-to-date inflows to leveraged loan funds total $14.4 billion, based on inflows of $10.3 billion to mutual funds and $4.1 billion to ETFs, according to Lipper.

The change due to market conditions this past week was steep, at negative $314 million, the largest decline since the week ended Feb. 17, 2016. Total assets were $97.8 billion at the end of the observation period. ETFs represent about 19% of total assets, at $18.5 billion. — Jon Hemingway

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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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US Leveraged Loan Funds Assets Grow to $154B

US loan fund AUM

U.S. loan fund assets under management grew for the 11th straight month in May, to $154 billion, the highest level since September 2014, according to Lipper and LCD.

While more cash in market might be unwelcome news for institutional investors already struggling to put money to work—AUM has grown by roughly $43 billion over the current streak—there is at least one silver lining for a buyside facing stiff competition for paper.

The $2.1 billion AUM increase in May is the smallest since the $1.6 billion advance in August 2016, and continues a trend of declining AUM growth since December, when loan funds saw their collective coffer swell by a whopping $9.5 billion. – Tim Cross

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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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Staples Credit Default Swap Cost Climbs on Word of LBO Effort

The cost to buy debt protection on bonds backing Staples gapped higher today, after Thomson Reuters reported that private equity firm Sycamore Partners was in advanced negotiations to acquire the troubled office-supplies retailer, pending the finalization of a debt-financing package.

Five-year CDS referencing Staples’ slim stack of bonds lurched up by 35 bps, or roughly 13%, in the biggest move higher today among CDS IG 28 constituent names. The latest indications, at 305 bps, are 60 bps wider since the start of June, and more than 100 bps wider since the company in early April revealed plans to explore a sale to private-equity interests.

Sycamore’s bid, which could be announced north of $6 billion as early as next week, apparently trumped one floated by Cerberus Capital Management, according to the report. For reference, Staples’ total enterprise value of just over $5.4 billion as of April 29 includes a net cash position, on $1.05 billion of total debt and nearly $1.3 billion of cash and short-term investments, according to S&P Global Market Intelligence.

Staples’ debt exposure is almost entirely from its two long-term debt issues, including the $500 million each of its 2.75% notes due Jan. 12, 2018 and 4.375% notes due Jan. 12, 2023, both of which date to issuance in January 2013. The company repaid its $2.5 billion B term loan last spring after regulators blocked its proposed $6.3 billion merger with Office Depot. The 4.375% 2023 issue traded this morning at roughly 102.25, according to MarketAxess.

Notably, both bond issues are subject to change-of-control puts at 101, should an M&A event force ratings below the investment-grade threshold by S&P Global Ratings and Moody’s.

At present, Staples is rated BBB–/Baa2, including a negative outlook at S&P Global Ratings and a stable outlook at Moody’s. Fitch rates the company below the IG line at BB+, with a stable outlook, following a downgrade in April 2016 predicated on the secular headwinds that prompted the ill-fated merger ambitions of Staples and its most direct retail analogue.

Operational struggles have been plain since the financial crisis, and were punctuated in March 2014, when the retailer chilled the credit markets with weaker-than-expected fourth-quarter sales, and attendant plans to shutter 225 stores in North America. From peak operating cash flow of more than $2 billion in 2009, Staples’ LTM operating cash flow slid to $1.6 billion in fiscal 2012, $1.2 billion in fiscal 2013, less than $1 billion in fiscal 2016, and $916 million over the latest LTM period to April 29, according to S&P Global Market Intelligence.

Its five-year CDS was indicated at roughly 250 bps both immediately after the regulatory blockade of the Office Depot merger and after the 2014 sales warning. This morning’s CDS reading is also roughly double the interim lows recorded in the summer of 2015, trade data show. — 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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US Leveraged Loan Market Grows to Record $909B

US leveraged loan market outstandings

The flood of institutional investor cash into the U.S. leveraged loan market has helped bring loan outstandings – a proxy for market size – to a record $909 billion in May, according to the S&P/LSTA Leveraged Loan Index.

This is the third straight month that the asset class has set a record. Outstandings have grown as 1) retail investors pour money into U.S. loan funds, amid expectations over the past several quarters of interest rate hikes (the most recent was June 15), and 2) issuance of collateralized loan obligation vehicles (CLOs) rebounds in the second quarter. CLOs are a major investor in U.S. leveraged loans.

Generally speaking, a floating rate asset class such as leveraged loans is attractive to investors in a rising rate environment, hence the increased focus and growth of the market recently. – Staff reports

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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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Yield-Starved Investors Might Disagree but U.S. Leveraged Loan Demand Eases

leveraged loan supply shortage

U.S. institutional investors struggling to put cash to work will be forgiven for remaining skeptical, but the U.S. leveraged loan market continues to trend in favor of the buyside. When that might translate into steadily higher yields and more meaningful deals remains to be seen, of course.

The trend toward the buyside is evident in LCD’s ‘Supply Surplus’ chart, which details U.S. leveraged loan market supply (the amount of loans outstanding, and available for trading in the secondary) versus investor demand (new issuance of CLOs, which buy up a large share of the market, as well as retail cash inflows into market).

The trend favoring investors is obvious: the supply shortage in May dipped to $1.67 billion, from a withering $14.1 billion in January. Investors, however, continue to sit atop a mountain of cash that has accumulated in market over the past few quarters, as potential interest rate hikes and other factors has made the leveraged loan asset class an attractive option. – Tim Cross

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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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Apollo Refinances $960M CLO via Goldman Sachs

Goldman Sachs today priced a $959.75 million refinancing of the ALM XVI CLO for Apollo Credit Management (CLO) LLC, according to market sources.

The manager is retaining a vertical slice to comply with risk retention in the U.S. in conjunction with the refinancing.

Pricing details are as follows:

The original $1.11 billion CLO was issued on July 20, 2015.

The refinanced transaction will settle on July 17. The reinvestment period runs until the payment date in July 2019. The legal final maturity is on the payment date in July 2027. — Andrew Park

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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.