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An Early Milestone for US Leveraged Loan Mart: $400B Institutional Issuance YTD

2017 leveraged loan issuance

Issuance of riskier ‘institutional’ credits already has topped $400 billion in 2017, the earliest in a year the U.S. leveraged loan market has hit that milestone, according to LCD.

Institutional loans are structured for and sold to non-bank investors, mainly collateralized loan obligation vehicles (CLOs) and retail loan funds, but also to hedge funds, pension funds, and other non-bank investors. These credits typically have more aggressive structures than those syndicated to traditional banks and finance companies (institutional credits might have a slightly longer tenor, or be second-lien, or are covenant-lite, for instance).

At its current pace – $404 billion YTD – U.S. institutional loan issuance would end the year at a whopping $539 billion, easily surpassing the existing record, $456 billion in 2013, according to LCD.

Sustaining such as pace will be difficult, however. Institutional issuance started off 2017 with a record $171 billion in the first quarter amid a wave of retail investor cash flooding into market, in anticipation of rate hikes from the Fed. It has trended steadily slower since then (though many of the levels remain impressive).

As well, history points to a slower end to the year. Since 2000, fourth-quarter volume has averaged 22% of the annual total. Given the heights at which the loan market started 2017, it would be no surprise to see a dip in that metric this time around.

Including ‘pro rata’ credits – revolving loans and amortizing term debt sold to traditional bank investors/finance companies – YTD U.S. leveraged loan issuance totals $511 billion, according to LCD. The record is $607 billion in 2013. – Tim Cross

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Guitar Center Downgraded to B3 from B2

Moody’s has downgraded Guitar Center’s corporate family rating to B3, from B2, on concerns about the company’s significant and relatively near-term debt maturities.

At the same time, Moody’s lowered the company’s senior secured first-lien notes to B3, from B2, while its unsecured notes were downgraded to Caa2, from Caa1.

All of Guitar Center’s ratings were also placed on review for downgrade.

“Excluding the company’s $375 million asset-backed loan facility, approximately 65% of the company’s long-term debt matures in about 18 months,” Keith Foley, a Senior Vice President at Moody’s said in the report.

Guitar Center’s $375 million asset-based credit facility (not-rated) matures on April 2, 2019. The company’s $615 million of 6.5% senior secured first-lien notes mature on April 15, 2019. Its $325 million of 9.625% senior unsecured notes do not mature until 2020.

Guitar Center technically still has about 18 months to refinance these debt obligations, and Moody’s expects the company’s operations will be stable. However, Moody’s said in the report that it believes the more compressed that time period becomes from this point on, the more challenging it will be for the company to address its debt maturity profile, particularly in light of the challenges faced by the company.

“These challenges include the company’s high leverage—debt/EBITDA on a Moody’s adjusted basis is about 6.2 times—limited revenue visibility regarding the retail environment for musical instruments and modest free cash flow,” Foley said.

Guitar Center, one of the largest retailers of music products in the United States based on revenue, operates as a wholly-owned subsidiary of Guitar Center Holdings, Inc. — Rachelle Kakouris

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Investors Withdraw $81M from US Leveraged Loan Funds

US loan funds

U.S. leveraged loan funds saw their sixth-straight net outflow this week, as investors withdrew $81 million from the asset class, according to Lipper. That makes for $849 million of outflows since mid-August.

The four-week moving average is now negative $91 million, slightly narrower than negative $98 million last week.

ETFs saw $18 million of outflows this week, while loan funds saw a $63 million withdrawal.

The change due to market conditions this week was $52 million (a 0.05% increase), with assets totaling $96.5 billion ($19 billion from ETFs). — Staff reports

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Starved for Yield, European Investment Grade Issuers Put Money Into HY Market

High-yield has already hosted a larger deal count from pure double-Bs this year than in any full-year stretching back to 2010, and last week, the European market also recorded the highest volume on this measure. Given what is understood to be swathes of money coming into the asset class from investment-grade accounts looking for yield, such issuers have been keen to meet the wall of demand, and exploit the subsequent lower cost of financing.

As of Sept. 20, 2017, the high-yield bond market had hosted 59 pure double-B rated deals for a total of €28.4 billion, which already surpasses the best full-year count of 53 deals, set in 2015. That year saw slightly more volume, at €28.5 billion, but with Miller Homes set to print £425 million of bonds (rated BB-) today, a new yearly record for double-B supply will then be set. — Luke Millar

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Fridson: High Yield Bond Covenant Quality See Record Plunge in August

The covenant quality of high-yield new issues suffered its biggest month-over-month decline ever in August. That plunge brought quality almost to the weakest covenant quality score on record. On a scale of 1 (strongest) to 5 (weakest), the FridsonVision version deteriorated by 0.73 points, to 4.59, from July’s 3.86 (see chart below). The worst score ever recorded was just a hairsbreadth worse, at 4.61 (June 2015).

hy cov quality

To provide background, “Covenant quality decline reexamined” (LCD News, Oct. 1, 2013) describes how we modify the Moody’s CQ Index to remove noise arising from month-to-month changes in the calendar’s ratings mix. On average, covenants are stronger on triple-Cs than on single-Bs, and stronger on single-Bs than on double-Bs. Therefore, for example, if issuance shifts downward in ratings mix in a given month, without covenant quality changing within any of the rating categories, the Moody’s CQ Index will show a spurious improvement. We eliminate such false signals by holding the ratings mix constant at an average calculated over a historical observation period.

In August, Moody’s version of the index worsened by 0.49 points, to 4.54, from July’s 4.05. The rating agency’s slightly more upbeat score (4.54 versus FridsonVision’s 4.59) reflected the distorting impact of a below-average concentration of issuance in the Ba category in August (24.0% versus historical mean of 32.4%). That effect was partially offset by a below-average concentration in Caa issues (20.0% versus a historical mean of 18.6%).

August’s precipitous month-over-month drop in covenant quality resulted from an across-the-board worsening in each rating category. By rating, the July and August average scores were as follows:

In short, issuers took full advantage of the shift in market conditions in their favor, as evidenced by a pickup in primary activity, from just 13 issues in July to 25 in August.

An across-the-board deterioration similar to last month’s contributed to the all-time record one-month plunge in the Moody’s version of the covenant quality index—0.76 percentage points in May 2016. That number was exaggerated by a large month-over-month increase in Ba concentration. Filtering out that effect, the FridsonVision series showed a deterioration of 0.68 points in May 2016, somewhat short of the record of 0.73 points posted in August 2017.

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Caesars Returns to Leveraged Loan Mart with $4.7B Deal Backing Resort Collection

A Credit Suisse–led arranger group is circulating price talk on a $4.7 billion covenant-lite first-lien term loan for Caesars Resort Collection, according to sources. Commitments are due by 5 p.m. EDT on Thursday, Sept. 28.

Price talk on the seven-year TLB is L+250–275 with a 0% LIBOR floor, offered at 99.5. That works out to a yield to maturity of about 3.96–4.22%. Lenders are offered six months of 101 soft call protection.

Facility ratings came in at BB/Ba3, with a 1 recovery rating from S&P Global Ratings. A $1.7 billion issue of senior unsecured notes due 2025 drew a B–/B3 profile, with a 6 recovery rating. Corporate ratings are B+/B1, with positive and stable outlooks.

Also notethat financing includes a $1 billion, five-year revolving credit.

Proceeds from the term loan and notes back the merger of Caesars Growth Properties Holding (CGPH) and Caesars Entertainment Resort Properties (CERP) and will refinance debt of both entities. Both CERP and CGPH have been in the market already this year repricing their outstanding loan facilities.

Caesars Resort Collection owns and operates casino properties in the U.S. — Staff reports

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Allison Transmission Scraps Would-Be Record-Low Leveraged Loan Repricing

U.S. loan investors, who have been accommodating corporate borrowers with increasingly low spreads and issuer-friendly structures for much of the past 12 months, have pushed back on a deal that would have tied a record-low pricing for a leveraged credit.

Allison Transmission today pulled its proposed repricing of a $982 million covenant-lite B term loan due September 2022, sources confirm.

The company earlier this month launched a repricing of the loan with price talk set at  L+175. This would have matched the lowest pricing of a leveraged deal seen in 2017, according to LCD.

Electricity concern Calpine printed a loan at the same level in January, to repay bonds. The Allison deal would have been the tightest level for a repricing since beverage concern Constellation Brands in 2014 (L+175, no floor).

As reported, Allison Transmission in March repriced its then $1.188 billion TLB to L+200, with a 0% floor, from L+250, with a 0.75% floor, part of a huge wave of loan repricing in 2017’s first quarter.

U.S. loan funds and ETFs have seen a net $13.65 billion of cash flow into market this year, according to Lipper, largely in anticipation of rate hikes courtesy the Fed, fueling demand for leveraged loan paper. Those inflows have stopped of late as the prospects of additional rate hikes this year and next have eased.
Allison Transmission (NYSE: ALSN) is a maker of automatic transmissions and hybrid-propulsion systems for on-highway trucks and buses. — Staff reports

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U.S. Leveraged Loan Funds Log $30M Outflow, Pushing Negative Streak to 5 Weeks

U.S. leveraged loan funds recorded an outflow of $30.4 million for the week ended Sept. 20, according to Lipper weekly reporters only. While modest in size, this prolongs a losing streak that now stretches to five straight weeks, totaling $768 million over that span.

U.S Loan Fund Flows

The outflow was driven by ETFs, which saw $36.8 million pulled during the period, while there was $6.4 million added to mutual funds.

With the smaller outflow, the four-week trailing average narrowed to negative $97.8 million, from $184.4 million last week.

Year-to-date inflows to leveraged loan funds now total $13.65 billion, based on inflows of $9.2 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 $13 million. Total assets were $97.45 billion at the end of the observation period. ETFs represent about 19% of the total, at $19 billion. — Staff reports

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Mattel Snags Looser Credit Covenants in the Wake of Toys ‘R’ Us Ch. 11

Toymaker Mattel has revealed that it is getting looser borrowing terms just after industry peer Toys ‘R’ Us filed for bankruptcy. Mattel today disclosed amendments to its credit facility in the wake of the Toys ‘R’ Us Chapter 11 filing, providing for relief from its consolidated-debt-to-consolidated-EBITDA requirement for the fiscal third quarter of 2017, and an increase in the ratio threshold to 4.5x for the fiscal fourth quarter, from 3.75x previously, according to regulatory filings. The ratio requirement then declines to 4.25x over the balance of the covenant-modification period, which ends at the issuer’s request or when consolidated debt to EBITDA is 3.75x or less for four consecutive quarters. (For more information on covenants, click here.)

For reference, Mattel in 2013 boosted its unsecured revolving credit facility to $1.6 billion, from $1.4 billion, under a leverage covenant of 3x.

Notably, the definition of consolidated EBITDA was amended to add back a cap on extraordinary, unusual, non-recurring, or one-time cash expenses, losses, and charges at $275 million, today’s filing shows. Other amendments include more restrictive covenants for receivable financing facilities, guarantee and lien triggers on ratings downgrades, greater restrictions against certain asset dispositions, and a broader base of subsidiary guarantees.

Leading toymakers Mattel and Hasbro have significant exposures to Toys ‘R’ Us, each deriving roughly 10% of their annual revenue from associations with the retailer, according to S&P Global Ratings.

Mattel’s credit profile was already eroding. The current BBB–/Baa2/BBB ratings reflect negative outlooks on all sides, and resulted from a Moody’s downgrade in March this year and subsequent downgrades by S&P Global Ratings and Fitch at the end of July, as top-line and margin headwinds mounted for the company, blocking its efforts to return to leverage in the low-2x area.

S&P Global Ratings yesterday said that its ratings on Mattel and peer Hasbro were not immediately affected by the Toys ‘R’ Us bankruptcy, though it noted that the filing “will cause incremental gross margin pressure and hurt profitability and cash flow if current receivables are not collected or are collected more slowly.”— John Atkins

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New Non-CLO Investors Boost Demand for Leveraged Loans in Europe

When it comes to leveraged loans, though the U.S. market still provides the most demand, liquidity in Europe is currently very strong, with the market suffering from a supply/demand imbalance for much of 2017 that has only just started to ease. On a relative-value basis, investors say European leveraged loan returns are very attractive now amid the negative rate environment, which has brought many new non-CLO investors into the leveraged loan market and increased demand substantially for the asset class.

LIBOR/Euribor comparison

 

Cinven and Bain’s take-private of Stada, for example, may be the largest European LBO in four years, but it is being funded entirely in Europe. Stada doesn’t have a natural need for dollars, so the cheaper European funding environment and high cost of swapping from dollars into euros at the moment mean it makes sense to raise funding locally. The financing includes a €1.65 billion term loan that is already on course to be one of the largest single-tranche facilities of 2017.

And sometimes, European investors simply aren’t keen on cross-border deals in either direction. “When it’s a U.S. business, it’s harder to get color on the books and an opportunity to interrogate management, and that one-to-one interaction disappears,” says a European investor, conceding that it’s also difficult on some of the European-based businesses doing cross-border financing. “And there are a few cases where we’ve done all the work, and then the deal goes to all dollars.” — Taron Wade

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