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Stall Speed: Growth at US Leveraged Loan Funds Grounds to Halt

leveraged loan fund growth

After nearly a year of heady gains, asset growth at U.S. loan funds ground to a halt in June amid a downshift in the leveraged loan market.

Loan fund assets grew by a thin $290 million last month, the least since a $900 million reduction in June 2016, according to Lipper and LCD. U.S. loan fund assets under management now total $154 billion. They totaled $134 billion at the beginning of the year.

The stall in growth comes as retail investors eye the asset class with deliberation. Cash flows into loan funds and ETFs in June totaled $153 million, according to Lipper weekly reporters, well off the $2.8 billion average over the prior five months. A rare occurrence of consecutive weekly withdrawals to end the month even brought the trailing-four-week average into the red to start July. The last time that number was negative was a year ago. – Staff reports

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Wall of Call: $160B of US Leveraged Loans Have Premiums Expiring in 3Q

leveraged loan call wall

There are some $160 billion of outstanding leveraged loans to corporate borrowers that have call premiums expiring in the third quarter, according to LCD, making these loans candidates for repricings and refinancings.

This fact will not be welcome news to U.S. loan investors, which already have been pummeled by some $350 billion of loan repricings – where an issuer simply cuts the interest rate on an existing credit – in the first half of 2017.

A silver lining for investors: Retail cash has stopped flooding the loan investor market, as the outlook for market-friendly interest rates hikes has dimmed, meaning there might be some relief from the repricing wave. Indeed, repricings in July have dropped off dramatically from earlier in the year.

In today’s leveraged loan market, many new issues include six months call protection, during which the issuer would have to pay a premium – 101 cents on the dollar, for instance – if the credit is refinanced. Thereafter, there is no premium to be addressed. – Staff reports

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Community Health High Yield, Leveraged Loan Debt Swoons as Earnings Underwhelm

Community Health bonds fell sharply in late afternoon trading Wednesday after the hospital operator rolled out preliminary second-quarter earnings that underwhelmed analyst expectations.

Community Health 6.875% notes due 2022 were the most actively traded, falling 3.5 points, to 86.5, according to MarketAxess. Over in loans, the issuer’s term loan H dipped about three quarters of a point on the day, to 99.75/100, sources said.

Adjusted EBITDA for the quarter is expected to clock in at roughly $435 million, according to a company release, or nearly 15% shy of analyst expectations of $510 million, based on consensus data provided by S&P Global Market Intelligence.

“The lower than anticipated results were primarily caused by lower than expected volume and the resulting lower net operating revenues,” the company noted in the release. “The results were also impacted by increases in medical specialist fees, purchased services and information systems expense.”

Community Health expects to book net operating revenue for the quarter of about $4.14 billion, compared with $4.59 billion in 2Q16.

Net cash provided by operating activities is expected to be about $261 million, and roughly $503 million for the first half of the year. This compares with $338 million and $632 million for 2Q16 and 1H16, respectively.

Community Health bonds had climbed sharply over the past few weeks as repeal efforts encountered enough resistance from GOP senators to potentially dispel the damaging potential impact on rural facility operators.

But the bonds shed gains this week as Senate Republicans moved to open a debate on at least a scaled-down version of repeal-and-replace legislation for the extant Affordable Care Act.

Franklin, Tenn.–based Community Health (NYSE: CYH) is an operator of general acute-care hospitals and outpatient facilities in communities across the U.S. — James Passeri

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Free Webinar/Replay from LCD: Global Leveraged Loan/CLO Market Analysis, Outlook

Leveraged Commentary & Data (LCD) will host a free webinar July 12. A panel of senior market commentators will highlight trends that have driven the global leveraged loan and CLO markets in the first half of 2017, as well as provide a look forward into the second half of the year.

excess loan demand

The webinar is geared to both novice and experienced market participants.

It will feature detailed market technicals, including new-issue yields, tightening CLO spreads, and new-money issuance. It will also outline broader market dynamics, such as the balance (or imbalance) between loan supply and investor demand and the influence of increasing PE/M&A activity.

You watch the webinar here (again, it’s free):

What: LCD Leveraged Finance Webinar

When: July 12, 2017 – 9:00 am EDT

The agenda:

Overview of Global Yields and How We Got Here: 

  • Persistent loan supply shortage leaves issuers in the driver’s seat
  • New-issue yields tighten to record lows in Europe and near record lows in the U.S.
  • Opportunistic activity dominates the loan market; will private equity M&A-driven supply return?

Europe’s Role: Uniqueness & Differentiators 

  • Liquidity pressures exacerbated by non-CLO investors
  • Covenant-lite takes hold
  • A comparison of sponsored and non-sponsored deal trends, including the bond to loan shift

Investors: How Are They Are Coping with Thin Spreads? 

  • Why tightening CLO spreads are still attractive compared to other asset classes
  • Why CLO equity remains popular
  • The broader interest rate perspective

Webinar participants, from LCD

  • Ruth Yang, Managing Director (Moderator)
  • Marina Lukatsky, Director-Research (US Loan Markets)
  • Taron Wade, Director (European Loan Markets)
  • Andrew Park, Senior Editor (CLOs)

LCD is an offering of S&P Global Market Intelligence.

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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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Leveraged Loan Investors Get Help from Private Equity Shops via LBOs

Leveraged loan investors pining for M&A activity amid the steady diet of opportunistic issuance during 2017’s first half have been getting at least some help from sponsors.

Private equity shops, which sit atop an ever-growing mountain of cash, have undertaken secondary buyouts at an impressive clip in 2017, racking up $31.1 billion in institutional loans supporting these transactions, according to LCD. This is the second-highest reading for any comparable time period on record (through July 20), behind $32.9 billion in 2014.

The total for 2017 already is the fourth-highest for a full year on record, behind the prior three years, which ranged from $33.2 billion (2015) to $45.3 billion (2014). If the current pace continues, the 2017 total will be upwards of $60 billion.

While LBO activity of any stripe is a welcome sight to today’s yield-parched investors, 2017 buyouts have been relatively limited to secondary transactions, in which one PE shop purchases an asset from another PE shop. Loans backing sponsor-to-sponsor deals account for 64% of overall LBO activity in 2017, the most since LCD began tracking this data in 2007 (based on transaction count).

 

Indeed, with stock prices remaining in the stratosphere, there have been precious few traditional public-to-private LBOs this year. Only 13% of 2017 leveraged buyouts have backed public-to-private transactions, with loans totaling $15.1 billion, according to LCD. It’s worth noting, however, that there is decent public-to-private loan volume en route, including such deals as Staples ($2.4 billion), West Corp. ($2.7 billion), and Parexel ($2.065 billion).— Staff reports

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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: Dryden 50 Prices $610M CLO

BNP Paribas yesterday priced the $609.9 million Dryden 50 Senior Loan Fund for PGIM, according to market sources.

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

Pricing details are as follows:

PGIM CLO 2017-07-25

The transaction will close on Aug. 29 with the non-call period running until July 15, 2019 and the reinvestment period ending on Oct. 15, 2022.

PGIM is currently the manager of or subadvisor for $13 billion across 24 different CLO and CDOs. PGIM is the principal asset manager for Prudential who has about $654 billion in assets under management.

Year-to-date issuance is now $57.39 billion from 102 CLOs, according to LCD data. This is the ninth new issue in July for a total of $4.9 billion. — Andrew Park

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As PE Dry Powder Hits Record High, Purchase Price Multiples Also Grow

As sponsors sit on piles of cash they want to put to use—private equity dry power as of May increased to a record $906 billion—PE shops have had to pay up on secondary deals (and on any LBO this year).

The average purchase price multiple on sponsor-to-sponsor transactions in 2017 is 10.6x, up from 10.4x in 2016 and the most since LCD started tracking this data (it was 9.4x in 2007). The average PPM on all 2017 LBOs was 10.3x (also the most on record).

Purchae Price Multiple Chart

For the record, of that aforementioned $906 million dry powder figure, roughly $560 billion of that is targeted for buyout funds proper, according to Preqin (venture capital and growth funds make up most of the remainder).

Meanwhile, excess sponsor cash has helped nudge leverage higher. Debt/EBITDA on secondary buyouts in 2017 has averaged 5.97x, well up from the 5.69x on these deals last year, and the most since the 6.02x in 2014.

Debt to Ebitda Ratio Chart

The equity contribution on secondary buyouts has inched higher from 2016, as well, with sponsors chipping in better than 40% on 2017 deals, compared to 38.9% last year.

With sponsor-to-sponsor transactions abound this year, the size of the loans backing those deals is relatively modest. The largest is a $1.885 billion credit backing the buyout of insurance concern USI by KKR and Caisse de dépôt et placement du Québec, from Onex. That B/B2 loan was priced at L+300, with a 0% LIBOR floor, and was offered at 99.5, for a four-year yield of 4.42%, according to LCD.—Staff reports

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US Leveraged Loans Gain 0.03%; MTD Return: 0.47%; YTD: 2.40%

Loans gained 0.03% today after gaining 0.03% on Friday, 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, gained 0.02% today.

Loan returns are 0.47% in the month to date and 2.40% in the YTD.

Daily loan index 2017-07-24

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Covenant-Lite Share of US Leveraged Loan Market Hits (Another) Record High

covenant-lite loans

Note: This story and chart have been updated to include July-end numbers. 

Covenant-lite loans, which offer less protection to institutional investors than do traditionally structured credits, continue to make up more and more of the $943 billion U.S. leveraged loan market. At the end of July, 72.7% of all outstanding loans were cov-lite, according to LCD. That’s the most ever, and is up from roughly 69% at year-end.

Cov-lite loans are credits that have  incurrence covenants – similar to a junk bond – rather than more restrictive maintenance covenants (you can read much more about this in LCD’s Loan Primer). For obvious reasons, they are more attractive to issuers, and have gained steady acceptance from loan arrangers and investors, particularly since 2012, when the U.S leveraged loan market found a higher gear after the financial crisis of 2007-08.

While the popularity of cov-lite loans has prompted worries in some corners of the market, historically, these deals have not defaulted any more frequently than loans with traditional covenants. Then again, as naysayers are fond of pointing out, they’ve never comprised this much of the market before, so they will be under scrutiny once the current credit cycle turns. – Staff reports

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U.S. Leveraged Loan Funds Record $137M Inflow, Led by $114M ETF Gain

U.S. loan funds recorded an inflow of $137 million for the week ended July 19, according to Lipper weekly reporters only. This marks the third consecutive weekly inflow for a total of $295 million over that span.

Loan Fund Flows U.S.

The four-week trailing average climbed into the black after two weeks in negative territory, rising to positive $8 million, from negative $64 million last week.

ETF flows were $114 million of the total this week, with about $24 million flowing into mutual funds.

Year-to-date inflows to leveraged loan funds now total $14.4 billion, based on inflows of $10 billion to mutual funds and inflows of $4.4 billion to ETFs, according to Lipper.

The change due to market conditions this past week was positive $136 million, marking the fourth straight week of increases. Total assets were $96 billion at the end of the observation period. ETFs represent about 19.7% of the total, at $18.9 billion.— 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.