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US High Yield Bond Funds See $620M Cash Outflow

us high yield funds

U.S. high-yield funds recorded an outflow of roughly $619 million for the week ended March 28, according to weekly reporters to Lipper only. The exit follows last week’s outflow of roughly $1.2 billion. The total outflow so far this year is now $15.5 billion.

Prior to a roughly $11 million inflow for the week ended March 14, U.S. high-yield funds endured a record high-yield outflow streak of $16.6 billion over an eight-week period.

Mutual funds drove the bulk of this week’s exit, with an outflow of $527 million, while roughly $92 million was pulled from ETFs.

The four-week trailing average narrowed to negative $577 million, from negative $598 million last week.

The change due to market conditions this past week was a decrease of $628 million. Total assets at the end of the observation period were about $199.3 billion. ETFs account for about 21.8% of the total, at $43.5 billion. — James Passeri

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Video: European Leveraged Loan Market Anlaysis

europe video 3.18In this month’s Capital Markets View video, LCD’s Taron Wade and S&P Global’s Chris Porter talk about the main trends in the European leveraged loan market.

Discussed this month:

  • European leveraged finance volume is very strong as the market approaches quarter-end, beating the YTD tally notched up in 2017, which was a record year. The overall volume figures also show European levfin remains dominated by loan supply, at the expense of bonds.
  • The new-issue volume seen in 1Q also reflects an uptick in M&A-related activity and new-money supply, as more than 60% of the volume came from new deals.
  • Accordingly, European repricing volume was much lower this quarter, while the U.S. equivalent is down YoY but still high on an absolute basis. Yields backed up in both markets, but higher LIBOR (than Euribor) means spread compression doesn’t impact yields as much in the U.S.
  • Average pricing on TLBs is edging higher, driven both by niche deals needing to offer more yield, and larger syndications pricing to clear the market.
  • Average institutional tranche sizes have increased as M&A has picked up, and this also suggests Europe’s more-mature market can now absorb larger loans.
  • Debt-to-EBITDA ratios are above 5x YTD in 1Q18, amid more senior-heavy deals. Larger deals can carry more leverage.
  • The CLO market has enjoyed a very strong start to the year, though there’s been a slight hiatus at quarter-end. The arbitrage remains attractive for managers, as while AAA spreads are little wider, loan spreads have also backed up.

The URL for the video: https://www.spratings.com/en_US/video/-/render/video-detail/capital-markets-view-march-20-1

Taron Wade heads up LCD’s European Research efforts. Chris Porter is Head of Loan Recovery & CLO Business Development, S&P Global.
As ever, please feel free to contact Taron or Chris if you’d like a particular topic discussed in next month’s video.

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Tesla Bonds Plumb New Lows on Moody’s Downgrade

Tesla’s debut 5.3% notes due 2025, which priced at par last August, again slid to new lows this morning, falling two points on the day, to 87, according to MarketAxess. The latest move lower follows a Tuesday ratings cut by Moody’s, alongside an outlook revision to negative, from stable.

The ratings agency lowered the electric-car manufacturer’s corporate and unsecured note ratings to B3 and Caa1, respectively, from B2 and B3, citing a “significant shortfall in the production rate of the company’s Model 3 electric vehicle.”

“The company also faces liquidity pressures due to its large negative free cash flow and the pending maturities of convertible bonds ($230 million in November 2018 and $920 million in March 2019),” Moody’s added in a Tuesday report. “Tesla produced only 2,425 Model 3s during the fourth quarter of 2017; it is currently targeting a weekly production rate of 2,500 by the end of March, and 5,000 per week by the end of June. This compares with the company’s year-earlier production expectations of 5,000 per week by the end of 2017 and 10,000 by the end of 2018.”

Tesla bonds have been pressured over the last several months by lackluster earnings and concerns surrounding the issuer’s ability to meet Model 3 production targets, and most recently by reports this week of mounting short positions across the issuer’s capital structure and a Tuesday tweet by the National Transportation Safety Board that the agency is investigating the fatal March 23 crash of a Tesla Model X near Mountain View, Calif.

The 5.3% notes due 2025 have now fallen as much as 5.75 points week over week, and 7.5 points from the start of the month.

Tesla said in a Tuesday blog post that the company does “not yet know what happened in the moments leading up to the accident” and that Tesla “does not have any idea what caused it,” adding the company has been unable to retrieve the vehicle’s logs due to extensive damage caused by the collision.

Short positions against Tesla’s debut unsecured notes climbed past $280 million in November, per IHS Markit, before a spate of covering in December that drove prices to roughly 96.5. IHS Markit noted, however, that the remaining par value of roughly $251 million short this week accounts for more than 13% of the total issue amount.

In terms of quarterly shortfalls, Tesla’s adjusted EBITDA for the quarter ended Dec. 31 was reported at roughly $33.76 million, down 63.1% from analyst expectations, based on consensus data compiled by S&P Global Market Intelligence. Meanwhile, Tesla notes were also pressured in November on the rollout of third-quarter results, which indicated a downturn in free cash flow alongside an unexpected EBITDA loss.

Tesla placed its debut 2025 offering in August to bolster the company’s balance sheet and for general corporate purposes ahead of the launch of Tesla’s Model 3, its first electric car designed for the mass market. The $1.8 billion tranche size reflected an upsizing from first thoughts at $1.5 billion.

Corporate and bond ratings are B–/B3 and B–/Caa1, respectively, with stable outlooks by S&P Global Ratings and Moody’s, and 3 recovery rating on the unsecured notes by S&P Global.

Tesla is a Palo Alto–based manufacturer of electric vehicles as well as energy storage and solar products. — James Passeri

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GCP Applied Tech Slashes Borrowing Cost Via $350M High Yield Offering

GCP appliedGCP Applied Technologies (NYSE: GCP) today placed a $350 million high yield bond offering, pricing the deal at 5.5%, a significant savings for the construction products technologies company.

The deal was led by bookrunners Bank of America Merrill Lynch, Deutsche Bank, Goldman Sachs, Citi, PNC, and KeyBanc Capital Markets. Existing unsecured ratings are BB–/B1.

The borrower intends to use the proceeds from the new print, along with up to $50 million of borrowings under its credit facility and cash on hand, to redeem its $525 million of existing 9.5% notes due 2023. Proceeds may also be used for general corporate purposes.

Analysts at S&P Global Ratings expect that, post today’s transaction, GCP Applied’s debt levels represent roughly a 50% reduction in book debt, compared with June 2017 levels. This is also partly due to the company paying down its debt with a portion of the proceeds from the $1.05 billion sale of its Darex Packaging Technologies segment to Henkel, completed in July 2017.

In August 2016, GCP completed a $275 million repriced B term loan (L+325, 0.75% LIBOR floor).

Structure for today’s pitch includes an issuer-friendly first call, at par plus 50% of the coupon. The equity clawback will be for up to 40% at par, plus the coupon during the non-call period.

Cambridge, Mass.–based GCP Applied Technologies produces and sells specialty construction chemicals and specialty building materials worldwide. — Jakema Lewis

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More Risk, Less Return: Spread vs Leverage on US LBO Loans

spread vs leverage

First-lien leverage on loans backing U.S. LBOs has crept to a record-high in 2018 as yield-starved institutional investors flock to these deals, looking to put huge cash stores accumulated over the past 18 months to work.

Those yields aren’t what they used to be, however.

Indeed, by one metric, LBO loans are less attractive for an investor now than at any time since the financial crisis.

Specifically, LBO loans this year offer institutional investors 75.1 bps of spread per unit of leverage (SPL). That’s down noticeably from 87.5 bps last year and 111.5 bps in 2016, according to LCD.

Spread per unit of leverage is defined as the ratio of potential return (spread) that an investor might receive, per unit of risk (leverage). Of course, the higher the SPL, the better the compensation for the investor, holding risk constant. In this analysis, it is measured as the institutional loan spread divided by a deal’s first-lien leverage.

While LBO loan SPL is way down from prior years, it is higher than the 65.2 bps in 2007, before the onset of the financial crisis (it soared to 120.3 bps in 2008). – Staff reports

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Yet Another Record for US Covenant-Lite Loan Issuance

The share of outstanding leveraged loans that are covenant-lite crept to another record high in February, reaching 75.8%, according to LCD and the S&P/LSTA Loan Index.

At the end of February the amount of U.S. leveraged loans outstanding was $984 billion, meaning there is now $745 billion of covenant-lite loan debt held by institutional investors.

The share of outstanding cov-lite loans matches the rate that newly-issued loans are cov-lite, according to LCD. Of the nearly $92 billion of U.S. leveraged term debt issued so far this year, $69 billion is cov-lite, according to LCD.

Cov-lite deals in some ways are structured akin to high yield bonds. They feature incurrence covenants, meaning an issuer must meet financial tests only if it wants to take particular actions (pay a dividend to its private equity owner, for instance). Fully covenanted loans, on the other hand, are far more restrictive. They entail maintenance covenants, where an issuer must meet financial tests each quarter, whether or not it wants to undertake an action.

Historically, cov-lite loans have defaulted at about the same rate – or slightly less often – than traditionally covenanted loans, though at the end of the last credit cycle – coinciding with the financial crisis of 2007-08 – there was a fraction of the cov-lite loan amount outstandings that there is today.

You can read more about how cov-lite loans work in LCD’s Loan Market Primer (it’s free).

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US High Yield Bond Funds See $1.2B Investor Cash Withdrawal

hy funds

U.S. high-yield funds recorded an outflow of roughly $1.2 billion for the week ended March 21, according to weekly reporters to Lipper only. The exit follows last week’s inflow of $11 million, which snapped a record high-yield outflow streak of $16.6 billion over the previous eight weeks.

The total outflow so far this year is now $14.9 billion.

ETFs drove the bulk of this week’s exit, with an outflow of $890 million, while roughly $284 million exited mutual funds.

The four-week trailing average widened to negative $598 million, from negative $388 million last week.

The change due to market conditions this past week was a decrease of $577 million. Total assets at the end of the observation period were about $200.6 billion. ETFs account for about 21.8% of the total, at $43.7 billion. — James Passeri

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Uber Navigates Leveraged Loan Market for $1.5B Credit

Uber Technologies today wrapped it $1.5 billion seven-year term loan tight to talk at L+400, with a 1% LIBOR floor and offered at 99.5, according to sources.

The so-called self-led deal had launched at L+425–450, with a 1% LIBOR floor and an OID of 99. Morgan Stanley acted as financial advisor to the company. The bank was lead arranger on Uber’s first syndicated loan, a $1.15 billion B term loan (L+400, 1% LIBOR floor) placed in July 2016. Uber was looking to directly borrow capital this time, rather than place a syndicated loan.

Uber’s first foray into the loan market began in much the same way, with the company tentatively gauging loan-market interest before progressing to syndication among restricted and unrestricted borrower groups.

Barclays, Citigroup, and Goldman Sachs were also arrangers on that transaction, proceeds of which were earmarked to fund development of new international markets and for general corporate purposes.

Of note, the loan placed in July 2016 is secured by the company’s assets, including the Uber brand and the ride hailing business’s intellectual property. And while the loan is covenant-lite, Uber’s ability to raise debt in the future hinges on an incurrence test tied to the performance of the restricted borrower group. The term loan transaction was privately rated.  — Mairin Burns

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European CLO Issuance Sees Record First Quarter

european CLO issuance

CLO issuance in Europe for the quarter through March 20 is €5.45 billion, and with a further two transactions likely to close out before quarter-end, 1Q18 would be the busiest first quarter of a year ever for this market, according to LCD.

It would also be the second-largest quarterly new-issue volume in the post-financial crisis “CLO 2.0 era” (the largest such tally is €7.7 billion, recorded in 4Q17).

These are important numbers for the leveraged loan asset class, as CLOs comprise a critical part of the investor base, in both Europe and U.S., often driving activity in that sector.

Of course, as more investors pile into the global CLO market – eyeing what historically have been relatively rich returns – spreads on these deals have dwindled, often testing record lows throughout 2017, and into 2018. – Staff reports

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Pacific Drilling, Lenders Spar Over Chapter 11 Progress, Exclusivity

pacific drillingSenior lenders of Pacific Drilling are keeping up their pressure on the company to reorganize sooner rather than later, objecting to the company’s requested 120-day extension of its exclusive periods to file and solicit acceptance to a reorganization plan, despite the company’s offer to agree to mediation in the Chapter 11 case in exchange for the extension.

The battle over exclusivity evidences the continuing breakdown of trust between the parties in the case, at least insofar as the senior lenders are concerned. Lenders have maintained since the case was filed that the company was merely seeking to delay the case and was not acting in good faith to develop a reorganization plan.

The company’s secured lenders late last month sought to force the company into mediation, but the company argued that mediation would be premature at this relatively early stage of the case, and the bankruptcy court overseeing the case denied the secured noteholders’ motion.

In connection with its requested exclusivity extension filed late last month the company said it would now be willing to engage in mediation with secured lenders, provided, among other things, that the senior creditors agreed to the exclusivity extension.

But senior noteholders would not bite, suggesting that the company’s offer to engage in mediation was insincere.

In a March 14 objection to the proposed exclusivity extension, an ad hoc group of secured noteholders noted that while the company “promised serious plan negotiations beginning in January,” it was not until the filing of its exclusivity motion last week that the company agreed to a mediation process.

“If past is prologue,” the ad hoc group asserted, “the debtors have not—and thus will not—show diligence, and extending exclusivity will not advance the cases.”

Beyond rejecting the company’s mediation offer, the ad hoc group charged that the company had “squandered” its first four months in Chapter 11 and “cannot point to any progress [it has] made to show cause to extend exclusivity.”

The ad hoc noteholder group further said, “What makes this failure even more egregious is the comparative simplicity of the task at hand: a balance sheet restructuring to be negotiated among well-organized creditor groups with experienced counsel.”

The company argued in its exclusivity extension motion last week that “after a contentious start to the Chapter 11,” it has “been working hard to jump-start meaningful restructuring negotiations.” The company also asserted that “a lot has been going on in these cases, mostly out of court,” citing numerous telephone conversations and face-to-face meetings with creditors, its development of a business plan, and its efforts to resolve various contingencies, including an arbitration case in London that could add $350 million to the company’s unrestricted cash and eliminate a $336 million unsecured claim against the company.

But the ad hoc noteholder group was not buying that, either.

“It was not until months after the cases were filed, and as their 120-day exclusivity period drew to a close,” the group said in its objection, “that the debtors even retained experts and began to put together a business plan.”

Wilmington Trust, the agent bank under the company’s senior secured credit facility, made a similar argument, reiterating its concern that the company and its equity sponsor, Quantum Pacific, were simply seeking to delay the case in the hope that changing market conditions would ultimately create value for an equity recovery in the case.

Meanwhile, lenders under the company’s prepetition revolver and Citibank, the agent under the company’s RCF, did not formally object to the extension, since doing so would, under the cash collateral orders entered in the case, endanger adequate protection payments to RCF lenders.

Still, Citibank said in its response to the motion, “The [bankruptcy] court … should be under no illusion that the agent supports the debtors’ request to extend their exclusive periods within which to file, and solicit acceptances on, a plan of reorganization.”

Similarly, an ad hoc panel of RCF lenders said in a court filing, “The absence of an objection to the motion should not be construed as affirmative support for an extension of exclusivity and that the RCF group has concerns regarding the progress of these cases.”

A hearing on the exclusivity extension is set for March 21. — Alan Zimmerman

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