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US Loan Fund AUM Growth Maintains Stall Speed

loan fund AUM

Assets at U.S. leveraged loan funds now total $156.7 billion, the most since September 2014, according to Lipper and LCD.

Despite the relatively lofty figure, asset growth at loan funds has slowed dramatically over the past few quarters, as the outlook for additional rate hikes by the Fed – which benefit a floating-rate asset class such as leveraged loans – has dimmed.

Indeed, loan fund AUM grew by a total of $600 million over the past two months, and have averaged growth of $620 million over the past four months, according to Lipper. Before that period, from December 2016 through May 2017 – when the outlook recording rate hikes was more bullish – loan fund AUM grew by an average of $5 billion each month.

Even with the slowing growth, investor demand for leveraged loan paper continues fierce, resulting in lower yields and riskier deals. Just last month the share of covenant-light loans – credits with restrictions that more resemble junk bonds than loans – hit an all-time high of 73%, according to LCD.

That demand is largely courtesy retail investors, which have put a net $14 billion into loan mutual funds and ETFs so far this year, according to Lipper. Also contributing to demand: Issuance of CLOs has rebounded to $92 billion so far this year, compared to only $52 billion at this point in 2016, according to LCD.

CLOs are special-purpose vehicles set up to hold and manage pools of leveraged loans. They currently account for some 60% of the roughly $950 billion U.S. leveraged loan market. – Tim Cross

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JC Penney High Yield, Loan Debt Swoon After 3Q Outlook

J.C. Penney notes were falling sharply in morning trading today, after the department store operator updated its third-quarter outlook to reveal materially weaker-than-expected metrics, driven by the company’s decision to liquidate “slow-moving” inventories across its women’s department.

The issuer’s 5.65% notes due 2020 and 5.875% notes due 2023 were down roughly six points and 3.625 points, respectively in early trading, to 91 and 96.75, according to MarketAxess. The 2020 issue subsequently traded as low as 90.25. The issuer’s B term loan due 2023 (L+ 425, 1% LIBOR floor) was quoted in the low 90s by late morning, down more than three points since yesterday, sources said.

Meanwhile, roughly a quarter of the retailer’s market cap vanished in morning trading, as shares (NYSE: JCP) fell about 25% to $2.75.

J.C. Penney now expects a loss per share for the third quarter of $0.45 to $0.50, wider than the analyst forecast for a $0.20 loss per share, based on consensus data compiled by S&P Global Market Intelligence.

The company also unveiled full-year guidance that falls short of consensus targets, with adjusted earnings per share expected to range from $0.02 to $0.08. The company earlier in the year forecast earnings per share of $0.40 to $0.65 for the full year.

“We realize the inventory liquidation favorably impacted sales during the months of September and October; however, we expect to deliver a positive low single-digit sales comp for this period, excluding the benefit of clearance sales,” the company said in a Friday statement. The company dropped the top end of its comparable-store sales forecast, which is now negative 1% to flat for the year.

Industry peer L Brands also saw an active decline in its bonds in early trading, with its 6.875% notes due 2035 down roughly 0.625 points, to 99.375, trade data show.

J.C. Penney is a Plano, Tex.–based operator of more than 1,000 department stores across the U.S. — James Passeri/ Kelsey Butler

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US High Yield Funds See Cash Inflow Courtesy Big ETF Gain

high yield fund flows

U.S. high-yield funds recorded an inflow of $122 million for the week ended Oct. 25, according to weekly reporters to Lipper only. This comes on the heels of last week’s outflow of $450 million.

ETFs drove the action this week with an inflow of $530 million, while $407 million exited mutual funds.

The four-week trailing average fell to positive $321 million from positive $399 million last week, and has now remained in the black for six consecutive weeks.

The year-to-date total outflow is now $6.7 billion, with an $11.6 billion outflow from mutual funds outweighing a $4.9 billion inflow to ETFs.

The change due to market conditions this past week was a decrease of $216 million, snapping a streak of eight consecutive weeks of increases. Total assets at the end of the observation period were $215 billion. ETFs account for about 25% of the total, at $53.8 billion. — James Passeri

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Staples High Yield, Loan Debt Take Hit Courtesy Amazon Business Prime Shipping

staplesStaples’ unsecured bonds and term loan, which were both placed in August to fund the issuer’s $6.9 billion buyout by Sycamore Partners, were falling sharply today on news that rival Amazon has extended its free-shipping Prime offerings to businesses, with Business Prime Shipping.

Staples’ $1 billion of 8.5% notes due 2025, which priced at par in August, were down as much as 2.625 points on the day, falling to 89.125, according to MarketAxess. The bonds have fallen from highs of 97.5 since the start of the month.

The 2025 notes, which were downsized from initial terms of $1.3 billion, were issued alongside a first-lien term loan, which was increased by $500 million, to $2.9 billion. The B term loan (L+400, 1% LIBOR floor) was bracketing 96 today, down roughly three points from the start of the week.

The Business Prime Shipping plans have separate offerings for small, medium, and enterprise businesses, offering annual rates in a range of $499–10,099, providing free shipping to more than 100 users in the enterprise category.

Staples (Nasdaq: SPLS) is an office-supply retailer that disclosed last month it would be acquired by Sycamore Partners for $6.9 billion. — James Passeri/Kelsey Butler

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Netflix Prices $1.6B High Yield Bond Offering to Yield 4.875%

Netflix (Nasdaq: NFLX) has completed a $1.6 billion offering of 10.5-year bullet notes at the middle of price talk, sources said. Bookrunners for the deal were Morgan Stanley, Goldman Sachs, J.P. Morgan, Deutsche Bank, and Wells Fargo. Proceeds will be used to fund general corporate purposes, which may include may include content acquisitions, production and development, capital expenditures, investments, working capital and potential acquisitions and strategic transactions. The streaming services giant plans to spend $7-8 billion on content during 2018, according to its third quarter 2017 earnings release. The Los Gatos, Calif.–based company was last in the market in April with a €1.3 billion offering of 3.625% unsecured notes due 2027. The company last tapped the U.S. bond market in October 2016 with $1 billion of 4.375% notes due 2026. Terms:

Issuer Netflix
Ratings B+/B1
Amount $1.6 billion
Issue Senior (144A/Reg S for life)
Coupon 4.875%
Price 100
Yield 4.875%
Spread T+256
Maturity April 15, 2028
Call non-call life
Trade Oct. 23, 2017
Settle Oct. 26, 2017 (T+3)
Bookrunners MS/GS/JPM/DB/WF
Price talk 4.75-5%
Notes Make-whole @ T+50; change of control put @ 101;

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Fridson: High Yield Bond Covenant Quality Hits All-Time Low

The covenant quality of high-yield new issues reached an all-time low in the third quarter, as measured by the FridsonVision series. Moody’s series, of which ours is a refinement, bottomed out in the second quarter. For reasons detailed below, the two series diverged in September, with FridsonVision’s showing minor improvement versus August’s reading, while the Moody’s series deteriorated slightly, month over month.

cov quality 3

To provide background, “Covenant quality decline reexamined” ($) 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.

cov quality

The opposite of the effect described just above occurred in September (see chart below). As the double-B component expanded from 24.0% of all issues in August, to 38.2% in September, Moody’s series worsened from 4.54, to 4.59 (1 = Strongest, 5 = Weakest). Filtering out the impact of monthly variations in ratings mix, the FridsonVision series showed a similarly sized improvement from 4.59, to 4.55.

On a quarterly basis, though, the pattern was reversed. The FridsonVision series deteriorated from 4.37 in August to an all-time low of 4.44 in 3Q17. This series’ previous worst score was 4.38 in 1Q15. Meanwhile, the Moody’s series improved slightly from its all-time quarterly worst 4.49 in 2Q17 to 4.47 in 3Q17 (see chart below). That seeming improvement in covenant quality reflected an unusually heavy concentration of issuance in the double-B category in 2Q17 and a return to about an average concentration in 3Q17. – Martin Fridson

This analysis was excerpted from Marty’s regular weekly column, available to LCD News subscribers. 

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In Overheated Leveraged Loan Market, Unregulated Lenders Gobble Up LBO Market Share

With U.S. leveraged loan issuance booming this year and as institutional investors continue to fight for higher-yielding paper, non-regulated lenders – mostly investment banks and large asset managers – have commanded much attention of late, as those entities make further inroads into the asset class, particularly with LBO deals.

Share of deals led by non-regulated arranger chart

This is a sensitive topic in the roughly $950 billion U.S. leveraged loan market, of course, as those non-regulated lenders are not bound by Federal guidelines set in 2013 that flag riskier deals for special ‘concern,’ ostensibly freezing out traditional money-center banks from a lucrative slice of the market.

Indeed, looking at the U.S. market, leveraged loans led by non-regulated lead arrangers have totaled $56.5 billion YTD, already well up from the $29.1 billion in all of 2016, and more than double the $22.6 billion in 2015, according to LCD. In the LBO space, non-regulated lenders figure even more prominently, accounting for $18 billion of loans so far this year, a big jump from $8 billion in 2016 and more than triple the $5.6 billion in 2015.

Looking at market share, it’s even more clear that non-regulated lenders are becoming a bigger factor.

They account for 11% of overall issuance so far in 2017, basically double the share in each of the last two years, according to LCD. In the LBO space, nearly one out of every five loan dollars backing a leveraged buyout was led by an unregulated lender, compared to 10% last year and 8% in 2015.

What does this mean regarding leverage?
This is an important question, of course, as regulated lenders have been subject to Federal guidance whereby transactions with pro forma debt/EBITDA of more than 6x “raises concern.” (This past June, however, the Treasury Department did recommend that the 2013 guidelines be re-issued for public comment, and that banks look at a set of metrics while underwriting loans, instead of solely the 6x figure. And just last week, the U.S. GAO ruled that the 2013 guidelines are reviewable by Congress, opening the door for the guidelines to be overturned.)

Overall, market leverage has not shifted from the 4.9–5x area of the last two years and, indeed, the average leverage of deals led by regulated arrangers held just under that level, at 4.8–4.9x. However, transactions whose lead arranger is not subject to the guidelines were levered at 5.8x on average this year, roughly a full turn higher than their regulated counterparts. In 2015 the two cohorts were 0.6x apart.

Pro forma debt/EBITDA ratios of LBOsThe disparity is clearer when looking at buyout loans. In 2015, LBOs led by regulated and non-regulated arrangers had roughly the same pro forma leverage ratio, at 5.6x and 5.7x, respectively. However, two years later the gap has widened to 0.9x, with leverage of deals led by non-regulated arrangers topping the 6x line, to 6.4x, while the rest of the sample remains in the mid-5s, according to LCD. — Marina Lukatsky

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US High Yield Bond Funds See $450M Investor Cash Withdrawal

Investors withdrew $450 million from U.S. high-yield funds this week, ending a four-week run of inflows totaling nearly $3 billion, according to Lipper. With the recent activity, the four-week average dips to a $399 million inflow, down from $728 million a week ago.

high yield fund flowsHigh-yield funds proper took most of the hit during the week, with a $281 million outflow, while ETFs saw a $169 million withdrawal.

Year-to-date, U.S. high-yield funds and ETFs have seen $6.8 billion of outflows, thanks to the funds, which have been hit with $11.2 billion of withdrawals so far in 2017. High-yield ETFs have seen $4.3 billion of inflows.

The change due to market conditions during the week was positive $169 million, marking the eighth straight advance. Total assets at the end of the observation period are $212.2 billion, with ETFs accounting for $53.3 billion of that. — Staff reports

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Leveraged Loans: Permira Debt Managers to Return to CLO Market

Permira Debt Managers (PDM) is making a return to the CLO market by planning to launch its first new issue since the credit crisis, according to sources.

The London-based debt manager has hired Bank of America Merrill Lynch to arrange its first 2.0 CLO issue. The bank has started warehousing a portfolio, and a launch is targeted for as early as the first quarter of next year.

PDM has started building a new team as part of a new strategy that will focus on growing the firm’s CLO business again. Andrew Lawson, head of capital markets at PDM, will become a senior member of that team, among others. He joined the firm in June this year.

clo volume

Global CLO issuance totals $106 billion so far this year, easily topping the $65 billion during all of last year, according to LCD. In Europe, CLO issuance in 2017 totals €14.2 billion, besting the full-year 2016 figure of €13.1 billion.

Private equity firm Permira first entered the CLO market prior to the financial crisis by launching its debt management business in early 2007. In November 2007, PDM priced its debut deal — the €300 million PDM CLO I — via RBS. Following the financial crisis, PDM shifted its focus to direct lending, having deployed €4 billion to more than 100 companies in Europe.

Since 2010, PDM has also focused on alternative credit strategies, closing four structured credit funds that invest in junior tranches of CLOs, both via the primary and secondary markets. Its last fund of this type, Permira Sigma IV, closed in September 2016 having raised €275 million. — Isabell Witt

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2013 Leveraged Lending Guidelines Deemed Reviewable by Congress

The 2013 Federal leveraged lending guidelines, which stipulated that loans with debt/EBITDA topping 6x ‘raises concerns’ from regulators, today was deemed subject to Congressional review, creating the possibility that those guidelines could be overturned, according to a report from Reuters.

The guidelines have been a point of contention in the U.S. leveraged loan market as they flagged deals topping what numerous market participants called an ‘arbitrary’ leverage figure, leading some lenders—particularly those under Fed oversight ($)—to steer clear of such deals.

Today’s decision, via the U.S. Government Accountability Office, is available here. The 2013 guidelines are available here. — Staff reports

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