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With Defaults Low and Oil Prices Rising, Distressed Debt Continues to Disappear

Thanks to a decade-long stretch of low interest rates, which has made it easier for troubled companies to kick the debt can further down the road, the already-scant opportunity for funds looking to buy up paper at distressed levels continues to shrink.

A seventh consecutive decline in the U.S. distress ratio has pushed the share of bonds trading in excess of 1,000 bps over the risk-free Treasury rate—the common measure of distress—to its lowest level in 3.5 years. At just 5.2%, it is significantly below the post-crisis high of 33.9% from February 2016, according to S&P Global Fixed Income Research.

In dollar terms, that equates to just $48 billion, merely a hair’s breadth from the near-four year low of $46 billion reached last month, and just 15% of the February 2016 high of $328 billion.

The dearth of opportunities is even more stark in leveraged loans, where the share of performing loans in the S&P/LSTA Leveraged Loan Index trading below 70 cents on the dollar (a level normally associated with deep distress and significantly high default risk) fell to just 0.56% as of May 30, the lowest it has been since December 2014. –

us loan distress ratio

One area where this is distress, of course, is retail, where the rate recently hit 24%, and in cosmetics/toiletries (32%, though that’s entirely driven by one loan issuer: Revlon). Both of these numbers are post-crisis highs, according to LCD.

While those numbers are eye-catching, the retail segment does not constitute a significant segment of outstanding leveraged loans, so the amount of paper involved is not large. – Rachelle Kakouris

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Leveraged Loans – Amid Continued Investor Demand, Second-Lien Issuance Surges

US second lien

The leveraged loan markets in both the U.S. and Europe have seen a boost in the issuance of second-lien activity as institutional investors and retail loan funds (in the U.S.) continue their hunt for higher-yielding paper.

As the name implies, second-lien loans reside lower in a deal’s capital structure, meaning they are repaid after the more-senior tranches (the first-lien debt). Consequently, they are inherently more risky, and therefore are more richly priced.

In May, Second-lien issuance in the U.S. leveraged loan market surged to its highest level in eight months, to more than $3 billion.

Europe second lien

In Europe, second-lien loans are rapidly becoming European private equity shops’ favored choice when adding a subordinated layer of debt to buyout financings, and to boost leverage. This activity has hit post-crisis highs, as the deep demand for paper threatens to push out high-yield bonds from all but the largest capital structures.

Indeed, the resurgence in second-lien is changing the very make-up of Europe’s buyout market. For the first time in the post-crisis era, the portion of buyouts taken by first lien-only structures has fallen below 50% this year, to 45% of deals, according to LCD. First lien-only structures were last year responsible for 61% of buyout transactions, and 75% in 2016. – Staff reports

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Uber Returns to US Leveraged Loan Market to Cut Borrowing Costs

Uber will approach the U.S. leveraged loan market tomorrow to reprice a $1.132 billion credit due 2023, according to sources. Further details of the deal are not yet available.

A Morgan Stanley–led arranger group has scheduled a lender call for noon EDT on Thursday to launch the repricing effort. The arranger group includes Bank of America Merrill Lynch, Barclays, Citi, Deutsche Bank, Goldman Sachs, HSBC, J.P. Morgan, RBC Capital Markets, and SunTrust Robinson Humphrey.

U.S. leveraged loan issuers over the past 18 months have taken advantage of intense investor demand in the segment to reduce pricing on existing loans. This activity peaked at more than $100 billion in January 2017, and has continued at a substantial pace since then, according to LCD.

Uber in 2016 placed the covenant-lite loan that is being repriced at L+400, with a 1% floor.
The company also approached loan investors earlier this year with a self-led seven-year term loan totaling $1.5 billion that also priced at L+400, with a 1% floor. — Jon Hemingway

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Octagon prices $611M Vehicle; YTD US CLO Issuance Tops $53B

Citi yesterday priced a $610.9 million CLO for Octagon Credit Investors LLC, according to market sources. This is the manager’s third new issue of the year.

Pricing details are as follows:

The transaction will close on July 10, with the non-call period running until July 2020, and the reinvestment period ending on July 2023. The legal final maturity is on July 2030.

Year-to-date new issuance in the U.S. is now $53.77 billion from 95 CLOs, according to LCD data. May’s volume is now $10.82 billion from 20 new issues. — Andrew Park

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Leveraged Loan Maturities Move Further Out on the Horizon

maturity wall

The U.S. leveraged loan market made headlines recently when it officially became a $1 trillion asset class, buoyed by the dizzying pace of issuance since 2017.

This debt has to be repaid, of course (in theory). Leveraged loan borrowers are in no hurry to do that, however, as the bulk of these loans don’t reach maturity until starting in 2021, when $107 billion comes due. That number ramps up sharply, peaking at $308 billion set to mature in 2024, according to LCD.

Why there is relatively little debt coming due in the near term is part of an interesting dynamic for the market.

Because of sustained institutional and retail investor cash flowing into this floating-rate asset class over the past two years – thanks to the specter of long-awaited rate hikes by the Fed – loan issuers have been able to refinance virtually all outstanding debt cheaply and easily, continually pushing maturities further along the horizon (that’s what was meant earlier in saying these loans have to be repaid “in theory”).

That borrower-friendly market can’t last forever, however. Already it’s been 10 years since the end of the last credit cycle, and there is at least a hint of consensus that, barring some exogenous event, the credit markets could have perhaps another two years of relatively smooth sailing.

When that period ends, however, borrowers might have less options where refinancing is concerned, just as increasing amounts of this debt comes due. – Staff reports

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Leveraged Finance Fights Melanoma: A Great Time for a Great Cause

The Leveraged Finance Fights Melanoma benefit and cocktail party is planned for Wednesday, May 23, at the Summer Garden at Rockefeller Center in Midtown Manhattan. Tickets and sponsorship opportunities are still available at the Melanoma Research Alliance website: www.curemelanoma.org/lffm.

Funds raised at the event will support the Melanoma Research Alliance (MRA), the world’s largest private funder of melanoma research, which was founded in 2007 by Debra and Leon Black, under the auspices of the Milken Institute.

Since this event was launched in 2012 the leveraged finance community has come together and generously supported more than $8.6 million of cutting-edge research to make transforming advances in the prevention, diagnosis and staging, and treatment of melanoma. This year’s event has already raised $1.95 million toward research.

This year, LFFM is chaired by Brendan Dillon (UBS), Lee Grinberg (Elliott Management), George Mueller (KKR), A.J. Murphy (BAML), Geoff Oltmans (Silver Lake), Jeff Rowbottom (PSP Investments), Cade Thompson (KKR), and Trevor Watt (Hellman & Friedman).

Attendees include the biggest names in leveraged finance, from all of the top banks, many investment houses, several law firms, select issuers, and some private equity sponsors. Over 90 firms are sponsoring the event. As with the prior events, S&P Global Market Intelligence/LCD are proud sponsors. Kirkland & Ellis and Veritas Capital Management are presenting sponsors. Platinum sponsors include Simpson Thacher, Apollo, Bloomberg Philanthropies, Fitch Ratings, IPREO, Midcap Financial, Paul Singer Foundation, PSP Investments, and UBS. Gold sponsors are Barclays, Block Communications, Cahill Gordon, Carlyle, Guggenheim, Hellman & Friedman, Latham & Watkins, JPMorgan Chase, KKR, Macquarie, Milbank Tweed Hadley & McCloy, Mizuho Americas, Morgan Stanley, Shearman & Sterling, Skadden Arps Slate Meagher & Flom, T. Rowe Price, Vista Equity Partners, Weil Gotshal, and Wells Fargo. For a full listing of sponsors, please visit www.curemelanoma.org/lffm.

Due to ongoing operational support from its founders, 100% of donations to MRA go directly to support research programs working toward a cure for melanoma, the deadliest type of skin cancer. Since MRA began its work, 11 new treatments have been approved by the FDA. Research performed in the melanoma field continues to have rippling impacts in the whole oncology space.

The data that MRA-funded scientists are generating is informing research in over 30 cancers, including colon, breast, brain, pancreatic, kidney, prostate, bladder, leukemia, lymphoma, and lung. Tickets are $300. For further information about the event and to purchase tickets, please visit www.curemelanoma.org/lffm.

Those seeking information about the event and sponsorship opportunities can contact Rachel Gazzerro of MRA at (202) 336-8947 or [email protected].

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Atotech Tests US High Yield Bond Mart with PIK Toggle Deal

Metals concern Atotech this week brought to the U.S. high yield bond market a $300 million unsecured PIK toggle offering, the first such deal since November, according to LCD.

A  PIK toggle offering affords the issuer the option of repaying interest with additional notes, as opposed to cash. The last unsecured PIK toggle offering was for Sotera Healthcare.

Ardagh Packaging placed a $350 million PIK toggle offering in January of this year, though that undertaking was secured.

PIK toggle issuance

Marketing efforts for Atotech are being run via J.P. Morgan and Barclays. Pricing is expected on Thursday, May 24. The notes will be printed through indirect parent company Alpha 2 B.V.

The issuer today also launched a $200 million add-on to its 2024 TLB. Proceeds of both the add-on loan and new unsecured bonds will be used to finance a dividend to shareholders. According to sources, the PIK toggle notes will offer a yield of 75 bps above the cash interest.

Atotech in January 2017 printed $425 million of 6.25% notes due 2025. Those bonds closed on Friday at 101.7, for a 5.73% yield, trade data show. – Jakema LewisNina Flitman

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US Leveraged Loan Funds See $731M Retail Cash Inflow

U.S. loan funds recorded an inflow of $731 million for the week ended May 16, according to Lipper weekly reporters only. This marks the largest inflow since $863 million for the week ended March 15, 2017.

It’s the thirteenth consecutive week of inflows for U.S. loan funds, for a total inflow of roughly $5.65 billion over that span.

Mutual funds drove the bulk of the weekly gain for a fourth consecutive week, with an inflow of about $518 million, while ETFs took in roughly $214 million.

The year-to-date total inflow is now $6.3 billion.

The four-week trailing average rose to $519 million, from $478 million last week, marking the 17th consecutive week in the black.

Total assets swelled to roughly $102.3 billion at the end of the observation period, which is the highest level since the week ended Sept. 24, 2014, when total assets were reported at $102.4 billion.

The change due to market conditions this past week was a decrease of $4 million. ETFs represent about 13.3% of total assets, at about $13.6 billion. — James Passeri

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Leveraged Loans: Covenant-Lite Share of Market Hits Record 77%

cov lite

April saw another record for covenant-lite issuance in the U.S. leveraged loan market.

By month-end, a full 77% of first-lien institutional loans outstanding were cov-lite, up slightly from the previous month, according to LCD.

The cov-lite market share has grown steadily, from roughly 60% in 2015, as retail investors and CLOs flooded the market with cash, looking to take advantage of the floating rate asset class amid rate hikes by the Fed.

Cov-lite loans have been in the spotlight over the past few years as their share of the market has grown. Detractors say these deals – which are structured akin to high yield bonds, offering less protection to lenders – could significantly impact recoveries when the current, long-running, issuer-friendly credit cycle turns.

In 2007, before the financial crises and at the end of the last credit cycle, cov-lite loans accounted for roughly 20% of U.S. leveraged loans outstanding. – Staff reports

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S&P Global: Europe’s Leveraged Finance Market Could Ride High Into 2019

Europe’s leveraged finance market is likely to stay buoyant for at least the rest of 2018, and probably the best part of 2019, says S&P Global Ratings in a report titled “How Long Can Europe’s Leveraged Finance Market Bonanza Last?

“As long as Europe’s growth cycle remains on track and is supported by quantitative easing and exceptionally low rates, we believe the operating environment is likely to be supportive,” said S&P Global Ratings in the report. “This is despite a number of potential problems that could trigger a turn in the market, most of which are external.”

The agency goes on to say that after €94 billion in high-yield bond issuance and €120 billion of leveraged loan issuance in 2017, market volumes are holding up in 2018, with €30.1 billion in bonds and €41.2 billion in loans issued in the first four months of the year.

The report states that causes for optimism include the improved credit performance of European corporates in recent months — with rating downgrades versus upgrades for high-yield issuers moving close to being balanced — and that this is backed by a macro environment that is supportive of operating performance, cheap funding conditions that are boosting the interest-coverage ratio, and a relatively prudent financial policy. Leverage has increased, but Europe sees less shareholder-friendly activity than in the U.S., where dividend payments and share buybacks tend to be a more prominent feature, S&P Global Ratings adds.

Another positive is the debt maturity profile, which gives companies some breathing space. Many issuers opportunistically refinanced their debt leveraging in the past year’s very favourable conditions, and debt maturities don’t pick up until 2021, thereby mitigating short-term risks, the agency adds.

“All this indicates to us that the tide is not yet ready to turn in Europe in 2018, and perhaps not even in 2019,” says the report. “As a result, we expect the corporate default rate in EMEA to remain very low at 2.5% by the end of 2018.” — Luke Millar

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