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European Leveraged Loan Default Rate Drops to Record Low

european leveraged loan default rate

In November, for the fifth month running, there were no defaults among loans in the S&P European Leveraged Loan Index (ELLI). As a result, the European leveraged loan default rate dipped to 1.16%, its lowest point since LCD began tracking this data in 2008, from 1.41% the previous month.

In the 12 months ended Nov. 30 the ELLI tracked €1.3 billion of institutional loan defaults and restructurings, down from €2.3 billion tracked at the end of 2016.

The ELLI default rate is calculated by summing up the par amount outstanding for issuers represented within the index that have defaulted in the last 12 months, and dividing that by the total amount outstanding in the index at the beginning of the 12-month period (excluding issuers that have already defaulted prior to this date).

For the purposes of this analysis, LCD defines “default” as (a) an event of default, such as a D public rating, a D credit estimate, a missed interest or principal payment, or a bankruptcy filing; or (b) the beginning stages of formal restructuring, such as the start of negotiations between the company and lenders, hiring of financial advisors, etc.

An historical low for loan defaults comes at an interesting time for the asset class. First off, the current bull-market credit cycle is chugging along in its ninth year, leading more than a few to speculate that defaults are bound to kick and (and soon).

Also, as credit market bears are fond of pointing out, part of the reason defaults remain low is that more and more issuers now take advantage of ‘covenant-lite’ loan structures, which place fewer restrictions on the borrower. Because of the cov-lite loans, issuers have much more room to maneuver in the face of financial obstacles, often putting off default proper (for a while, anyway, bears will add). – Staff reports

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U.S. Leveraged Loan Repricing Activity Keeping the Market Busy at Year End

Leveraged loan repricing activity in the U.S., which started 2017 with an unprecedented bang, is not ending the year with a whimper.

Helped along by a perpetually accommodating investor market, repricings totaled $71.9 billion in November, making it the second-busiest month for these deals ever, after the epic $101 billion in January, according to LCD.

Leveraged loan repricing volume

With the recent activity, repricings in 2017 total a dizzying $520 billion and have averaged some $47 billion per month, nominally topping what has been a record year in the overall leveraged loan market, with $468 billion of new institutional issuance to date. (As usual, we’ll note that there’s some overlap in the these numbers; the total institutional issuance figure includes some $100 billion in repricings that were re-syndicated, as opposed to completed via amendment.)

Room to run?

Will the repricing wave continue into December, and through year-end, a notoriously sleepy time for the leveraged finance market?

If the Call Wall is any indication, repricings could keep the market busy—if grumpy—into the holidays. There is $63 billion of outstanding institutional issuance on which call premiums expire in December, with the bulk priced at par or higher, roughly the same as in November. The Call Wall eases somewhat in January and February, before stepping down sharply as 2018 progresses.

Par amount outstanding by prepay call expiration

Repricing activity depends on whether institutional investors continue to accommodate investors, of course, something they seem prepared to do. Indeed, the soaring November repricing activity comes despite 1) a net outflow of roughly $1.5 billion from U.S. loan funds and ETFs so far this month, according to Lipper weekly reporters—that’s $2.5 billion if you take into account reclassifications between open- and closed-end funds, and 2) a 23 bps dip in loan prices, per the Index, due in large part to contagion related to the sell-off in the high-yield bond market this month.

Even with the recent outflows, investors continue to sit atop cash. There has been a net $11.1 billion added to loan funds so far this year, according to Lipper.—Tim Cross/Marina Lukatsky

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US Leveraged Loan Returns Shrink in November

US leveraged loan returns

Returns on U.S. leveraged loans dipped to a thin 0.012% in November as the asset class felt the effects of a sell-off in the neighboring high yield bond market (which lost 0.27% during the month) and as retail investors continued to tread cautiously around floating rate debt.

The recent performance brings loan returns during the first 11 months of 2017 to 3.71%, a far cry from the 9.15% at the same point in 2016, according to LCD. The loan market rebounded significantly during 2016’s second half, posting out-sized returns, thanks to a long-awaited interest rate hike by the Fed.

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Valeant Pharma Prices $1.5B High Yield Offering to Refi Maturing Debt

Broad market issuer Valeant Pharmaceuticals today placed $1.5 billion of eight-year notes via sole bookrunner Barclays. Prior to pricing, the offering was upsized by $500 million. Proceeds will be used to fund a tender offer for the borrower’s 7%, 6.375%, and 5.375% notes due 2020. Valeant last month placed a $750 million add-on to its secured notes due 2025. Valeant Pharmaceuticals (NYSE:VRX) develops, manufactures, and markets pharmaceuticals worldwide. Terms:

Issuer Valeant Pharmaceuticals 
Ratings B–/Caa1
Amount $1.5 billion
Issue Senior (144A/Reg S for life)
Coupon 9%
Price 98.611
Yield 9.25%
Spread T+691
Maturity Dec. 15, 2025
Call non-call four (par +50% coupon)
Trade Dec. 4, 2017
Settle Dec. 18, 2017 (T+10)
Sole bookrunner Barc
Price talk n/a
Notes Upsized from $1 billion; change-of-control put @ 101; up to 40% equity claw

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With Busy November, European CLO Issuance Hits Post-Crisis Record

european CLO issuance

November issuance has pushed European CLO volume to a  post-crisis high, amid record tight liability spreads.

The market has grown to €18 billion through November, thereby eclipsing the previous post-crisis  record of €16.8 billion, set in 2016, according to LCD. Moreover, the final 2017 volume total could rise above €20 billion, as more managers are lining up deals before year-end.

Putting the €18.1 billion new-issue volume into perspective, 2007 saw the peak of pre-crisis European CLO issuance, according to S&P Global Ratings, which rated 71 CLO transactions worth €35 billion that year. And comparing the CLO market to loans, 2017 institutional loan volume stood at €96 billion as of Dec. 1 (the annual record is €111 billion, set in 2007).

Much of this year’s loan volume stems from opportunistic borrowing, however – largely refinancing of existing debt – with M&A-related activity at just €35.7 billion this year, versus €70.2 billion in 2007. Refinancings add no new money into a yield-starved investor market, and in hot markets, such as today, the end result of these deals is decreased return for investors already involved in the transaction.

For more info on CLOs and how they work check out LCD’s online Loan Market Primer. – Luke Millar

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A Busy Week for US Leveraged Loan Market as Issuers as Investors Eye Year-End

us leveraged finance issuance

Loan issuance by non-investment grade borrowers totaled a hefty $20 billion last week, as the U.S. leveraged loan market looks to sprint toward year-end, capping off what already is a record year of activity.

Last week’s loan activity was the most since the $25.8 billion the week of Sept. 8, according to LCD.

So far in 2017 U.S. leveraged loan issuance has totaled nearly $487 billion, topping the full-year record of $456 billion set in 2013. These numbers take into account only institutional issuance – higher -priced, riskier credits sold to non-bank investors such as CLOs, pensions funds, and hedge funds, for example. Leveraged loan issuance has soared throughout 2017 as institutional investors look to work through the roughly $12 billion in cash that has built up in U.S. loan funds and ETFs this year, according to Lipper, largely in anticipation of rising interest rates earlier in 2017.

The highest-profile transaction to emerge last week was a $3.725  billion credit backing Sinclair Broadcast Group‘s acquisition of Tribune Media. 

The other component of the leveraged finance market, high yield bonds, also was busy last week, with $9.8 billion of transactions priced. Most visible here is a $1 billion offering for cereal maker Post Holdings. The deal redeems more expensive debt and backs the acquisition of Bob Evans Farms.

U.S. high yield issuance in 2017 totals $255 billion (not including the $4 billion in transactions launched today), easily topping the $229 billion completed during all of 2016.- Staff reports

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CVS Eyes $45B in New Debt for Aetna Buy

CVS logoBonds backing CVS Health (NYSE: CVS) are leaning wider this morning after the company’s Sunday confirmation of a blockbuster $77 billion, debt-financed deal to merge with Aetna (NYSE: AET), though the bulk of the move wider for bonds took place over the last week in anticipation of the formal M&A announcement, trade data show.

The debt portion of the financing would be among the heftiest ever attempted. CVS today on the M&A call said the company would look to place $45 billion of new debt and draw on cash on hand to finance the merger, which is slated to close in the second half of 2018, pending shareholder and regulatory approvals. The definitive agreement values Aetna shares at roughly $69 billion, and the $77 billion transaction price includes the assumption of Aetna debt. Barclays, Goldman Sachs, and BAML are providing $49 billion of financing commitments, according to CVS.

The biggest single debt offerings on record remain the $49 billion, eight part deal placed by Verizon in September 2013 for its acquisition of Vodafone’s stake in Verizon Wireless, and the $46 billion, seven-part deal placed by Anheuser-Busch InBev in January 2016 for its SABMiller buy. AT&T in July this year placed $22.5 billion of notes, or the third biggest offering on record, and the anchor piece of a $40 billion debt-financing package backing its now-imperiled bid to merge with Time Warner.

CVS, now a decade out from its transformative acquisition of Caremark, in 2015 placed $15 billion of notes backing its $12.7 billion acquisition of Omnicare and $1.9 billion acquisition of Target’s pharmacy and clinic businesses.

CVS 5.125% bonds due July 20, 2045 led the charts for trading volume this morning, changing hands at a weighted average of T+172, from T+170 on Friday and T+161 one week ago. The bonds lurched wider from T+133 after press reports on Oct. 26 tipped the advanced merger talks.

Meantime, Aetna 2.75% notes due 2022 traded this morning at T+88, or only a few basis points wider week to week, but up from trades at T+54 ahead of the revelation of M&A ambitions late last month.

Five-year CDS debt-protection costs actually ebbed this morning by three basis points, to a reading near 65 bps, according to Markit. The close on Friday at 68 bps was the high-water mark since The Wall Street Journal broke the story on Oct. 26, reflecting a move up from 50 bps on Oct. 25. Aetna five-year CDS was steady today near 39 bps, but was up from 26 bps on Oct. 25.

CVS carries BBB+/Baa1 senior ratings at present, while Aetna is rated A/Baa2/A–.

S&P Global Ratings and Moody’s today placed their rating on CVS under review for possible downgrade, but both noted that they expected any cut to be limited to one notch. Both agencies also affirmed their respective Tier 2 short-term commercial paper ratings, on a view that the combined entity would retain strong liquidity and would target rapid deleveraging under a proposed prepayable capital structure.

Notably, both CVS and Aetna today announced that they would suspend share buybacks as of today to enable post-M&A debt reduction. CVS repurchased more than $4.8 billion of its shares over the 12 months to Sept. 30 this year, while Aetna bought back nearly $3.9 billion over the same span, according to S&P Global Market Intelligence.

S&P Global Ratings expects adjusted debt to EBITDA to lurch up to 4.5x–4.8x pro forma for the closing of the transaction—from 3.2x for the LTM period to June this year—and to remain above 4x for more than a year.

CVS’ own leverage targets are for 4.6x at closing, the mid-3x area two years post the closing, and the low-3x range ultimately, with rapid debt pay-down a priority in defense of the commercial-paper ratings. The companies also intend to maintain existing capitalization structures at the insurance subsidiaries in defense of their investment-grade profiles.

“The combination of CVS and Aetna will create a one of a kind vertically integrated healthcare company with huge scale and mark an industry shift towards a more seamless approach to managing healthcare costs as it brings together the overall management of a patient’s medical bills and prescription drugs under one umbrella”, said Moody’s Mickey Chadha in a research note. “However, the transaction will result in significant weakening of CVS’ credit metrics as it will be financed with a large amount of debt and will come with high execution and integration risks.”

Additional factors in the Moody’s downgrade review include the CVS’ exclusion from two new restricted network relationships between Walgreens and Prime Therapeutics, as well as between Walgreens and the Department of Defense Tricare program; reimbursement rate pressures, and weak front-end sales, which will exert drag on CVS earnings over the medium term, the agency noted.

Consideration for a deal would be in the context of Aetna’s $58.9 billion enterprise value at the start of the quarter, which included more than $9.1 billion of total debt and $3.6 billion of cash and equivalents, according to S&P Global Market Intelligence. CVS carried a total enterprise value of more than $101 billion into the current quarter, including $26.8 billion of total debt and $2.2 billion of cash and short-term investments. — John Atkins

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US Leveraged Loan Default Rate Rises to 13-Month High

US leveraged loan default rate

With four issuers filing for bankruptcy protection in November —Pacific DrillingExGen Texas PowerCumulus Media, and Walter Investment Management—the default rate of the S&P/LSTA Leveraged Loan Index jumped to a 13-month high of 1.95%, from 1.51% at the end of October.

The rate has climbed steadily from an 18-month low of 1.36% at the end of July, but remains well inside the high of 2.17% in July 2016. By number of issuers, the default rate has increased to a 10-month high of 1.72%, from 1.41% in October.

While the rate climbed noticeably last month, loan market players remain relatively sanguine regarding defaults, and the credit cycle in general. Per LCD’s survey of North American portfolio managers and buyside players, the U.S. leveraged loan default rate likely won’t hit its historical average of 3.1% in 2019.

This quarterly survey was conducted in late September. It will be interesting to see if market players adjust their expectations for the next survey, which LCD will publish before year-end. – Rachelle Kakouris

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After $6.5B of Withdrawals, Investors Cautiously Approach High Yield Mart

US high yield fund

U.S. high-yield funds recorded an inflow of $310 million for the week ended Nov. 29, according to weekly reporters to Lipper only. This follows last week’s exit of $209 million and snaps a streak of four consecutive weeks of outflows, which saw a total exit of $6.5 billion over that period.

ETFs were the driver behind this week’s action, with an inflow of $602 million that outweighed the $292 million exodus from mutual funds. Mutual funds have now posted outflows for seven consecutive weeks, for a total exit of $5.4 billion over that span.

The four-week trailing average narrowed to negative $1.2 billion this week, from negative $1.6 billion last week, which marked the widest level since March.

The year-to-date total outflow is now roughly $12.9 billion, reflecting a $16.3 billion exit from mutual funds and a $3.4 billion inflow to ETFs.

The change due to market conditions this past week was an increase of $133 million. Total assets at the end of the observation period were $208.5 billion. ETFs account for about 25% of the total, at $52.2 billion. — James Passeri

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