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S&P Global Ratings Publishes Comprehensive CLO Primer

S&P Global Ratings recently published a comprehensive primer to provide a high-level overview of the collateralized loan obligation (CLO) market.

The Primer begins with “What is a CLO?” and covers topics such as:

  • The typical structure of a CLO
  • What is a broadly syndicated loan?
  • How is the portfolio of a CLO composed and how do the different tests work?
  • The typical CLO lifecyle
  • An overview of how S&P Global Ratings analyzes each CLO

You can view the CLO Primer here.

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Amid Investor Demand, Envision Accelerates Response Date on $5B Leveraged Loan

Leveraged loan investors considering the $5.05 billion first-lien term loan backing KKR’s buyout of Envision Healthcare have until tomorrow to commit to the deal, as opposed to the original deadline of Oct. 1, according to sources.

No further changes on the Credit Suisse-led deal were announced.

Price talk for the seven-year covenant-lite TLB is L+400, with a 0% LIBOR floor and an OID of 99–99.5. That works out to a yield to maturity of about 6.59–6.68%. Lenders are offered six months of 101 soft call protection.

The full arranger group includes Citi, Morgan Stanley, Barclays, Goldman Sachs, Jefferies, UBS, RBC Capital Markets, Societe Generale, HSBC, Mizuho, BMO Capital Markets, SunTrust Robinson Humphrey, Credit Agricole, and KKR Capital Markets.

Agencies have assigned ratings of B+/B1 to the first-lien facility, which includes a $300 million revolver due 2023, with a 3 recovery rating from S&P Global Ratings. A $550 million ABL facility is rated BB/Ba1, with a 1 recovery rating. Corporate ratings are B+/B2, with negative and stable outlooks, respectively.

Additional financing for the buyout will come from a $1.625 billion offering of eight-year (non-call three) unsecured notes.

KKR announced in June that it was taking Envision private for $46 per share in a deal valued at roughly $9.9 billion, including debt. Envision (NYSE:EVHC) is a provider of physician-led services and post-acute care, and ambulatory-surgery services. — Jon Hemingway

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US CLO Issuance Continues on Record Pace; $99B YTD

US CLO issuanceCLO issuance in the U.S. has totaled $99 billion already this year, easily outpacing the $71 billion at this point one year ago, according to LCD. The CLO market is on pace to top the record $124 billion in 2014.

CLOs are special-purpose vehicles set up to hold and manage pools of leveraged loans.

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European CLO Issuance Continues on Record Pace

Europe CLO issuance

Issuance of collateralized loan obligation vehicles in Europe so far this year, at €20.41 billion, has nearly topped the €20.91 billion seen during all of 2017, according to LCD.

While activity in the segment is expected to roll on, a pair of huge cross-border LBOs to clear market recently – Refinitiv and Akzo Nobel – did cause some consternation for CLO players, as those deals priced at a tighter level than expected, market sources said.

Refinitiv’s $2.75 billion-equivalent euro-denominated term loan priced at E+400, after being initially launched to market at E+425, while a €1.79 billion credit for Akzo eventually priced at E+375 after being first talked at E+425. Pricing on both was cut due to investor demand.

Refinitiv backed Blackstone’s $17 billion acquisition of a Thomson Reuters Financial & Risk unit stake. Akzo backed Carlyle and GIC’s buyout of the company.

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In Test of Market, Refinitiv Wraps Massive LBO Financing; Top Deals All-time

Refinitiv last week closed a $14.25 billion leveraged loan and high yield bond package backing the LBO of Thomson Reuters’ Financial & Risk business by private equity concern Blackstone, successfully testing just how big a deal can get done in today’s red-hot global leveraged finance market.

biggest LBO dealsIndeed, despite its size—Refinitiv is the second-largest LBO financing since the financial crisis—and deal structure that some in market called aggressive, banks arranging the transaction reduced the interest rate on offer to investors during the syndications process, and commitments to the loan portion of the deal topped the $9.25 billion final amount, indicating strong investor demand for leveraged loan assets, both in the U.S. and in Europe.

The high yield bond portion of the financing ended at $4.25 billion after being reduced to compensate for an increase in the loan.

largest financings 1

As well as being the second-largest leveraged buyout since the financial crisis, Refinitiv is the ninth-largest leveraged finance deal of all time, according to LCD. Leveraged finance entails leveraged loans and bonds to speculative grade issuers.

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With Help from Refinitiv, LBO Leveraged Loan Issuance tops 2017 Levels

lbo loan issuance

Big-ticket LBOs are driving the U.S. leveraged loan market in 2018.

So far this year $90 billion of credits backing buyouts have been launched or completed in the syndicated loan market, nearly as much as in all of 2017, according to LCD.

The 2018 LBO loan figure has received a huge boost of late via a spate of jumbo transactions. Chief among them is Refinitiv, which includes $6.5 billion of institutional loan debt backing Blackstone’s $17 billion takeover of Thomson Reuter’s financial data and technology unit (the PE firm is acquiring a 55% stake). The loan portion of the deal was targeted for $5.5 billion, but was increased due to investor demand.

Tellingly, the high yield bond portion of the Refinitiv financing was decreased at the same time, illustrating the clear preference that speculative-grade debt investors have for loans this year, compared to bonds

As is often the case, LBO loans and other M&A deals are in keen demand from institutional investors as these credits generally offer higher pricing and richer returns than do non-M&A credits, because of their increased leverage and often-aggressive terms.

Of course, with the chance for higher returns comes more risk. This is especially the case today, as most credits completed in market now are covenant-lite, meaning they are less restrictive for the issuer, and consequently offer investors and lenders less protection during the life of the loan.

Indeed, of the $90 billion in LBO loans so far this year, $78 billion is cov-lite. This tracks with the overall U.S. leveraged loan asset class, which now totals some $1.1 trillion, according to the S&P/LSTA Index. Roughly 80% of those outstandings are cov-lite. – Staff reports

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Covenant-Lite Share of US Leveraged Loan Market Hits Record 79%

The share of covenant-lite deals in the U.S. leveraged loan market continues to reach new heights. The latest record: As of August, cov-lite accounted for 78.64% of outstanding loans, up from 77.8% in July, according to the S&P/LSTA Loan Index.

This is the 10th straight record. The cov-light share of market has increased steadily from roughly 64% in August 2015.

Cov-lite loans are in some ways structured akin to high yield bonds, in that they feature incurrence covenants, as opposed to the more restrictive maintenance covenants.

With an incurrence covenant a debt issuer would have to meet a specific financial test only if it wanted to undertake a particular action (like borrow money to fund a dividend to a private equity sponsor, for instance). Under a maintenance covenant the issuer would need to meet regular, specific financial tests, even if it did not want to undertake that dividend deal.

Market pros agree that the cov-lite loan structure will hinder recoveries on bank loans, whenever the current credit cycle turns and defaults begin to mount, though the jury is out as to just how much of a hit recoveries will take.

One hint: S&P’s LossStats, and LCD, conducted analysis on recoveries of cov-lite loans that defaulted before the 2008-09 financial crisis, versus those that were structured and defaulted after the crisis. The later-vintage group of cov-lite loans saw an average discounted recovery of 56%, compared to a 78% average recovery on the earlier deals (though the data in the later sample is thin, as there have been few leveraged loan defaults during this cycle). You can read more about this LossStats analysis here. – Staff reports

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Web.com Wraps $1.5B Leveraged Loan Backing LBO by Siris Capital

Web.com Group completed the covenant-lite term loan financing for its buyout via a Morgan Stanley–led arranger group, according to sources. The $1.095 billion first-lien term loan due 2025 (L+375, 0% LIBOR floor) priced at an OID of 99.75, and the $420 million second-lien term loan due 2026 (L+775, 0% floor) came at 99.25. Both priced tight to talk, and the first-lien was increased by $15 million to replace revolver draws. Financing also includes a $100 million, five-year revolver with a springing leverage covenant. Proceeds are being used to finance the take-private buyout of the company by Siris Capital in a roughly $2 billion deal. Web.com Group is a global provider of internet services and online-marketing services for small and midsize businesses. Terms:

Borrower Web.com Group
Issue $1.095 billion first-lien term loan
UoP LBO
Spread L+375
LIBOR floor 0.00%
Price 99.75
Tenor 7-year
YTM 6.25%
Four-year yield 6.31%
Call protection 101 soft call for 6 months
Corporate ratings B/B3
Facility ratings B+/B2
Recovery rating 2
Financial covenants None
Arrangers MS/RBC/Macq
Admin agent MS
Px Talk L+400-425/0%/99-99.5
Sponsor Siris Capital
Notes Upsized by $15 million.
Borrower Web.com Group
Issue $420 million second-lien term loan
UoP LBO
Spread L+775
LIBOR floor 0.00%
Price 99.25
Tenor 8-year
YTM 10.61%
Four-year yield 10.79%
Call protection 102, 101 hard calls
Corporate ratings B/B3
Facility ratings CCC+/Caa2
Recovery rating 6
Financial covenants None
Arrangers MS/RBC/Macq
Admin agent MS
Px Talk L+800-825/0%/98.5-99
Sponsor Siris Capital
Notes

 

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Middle Market: Private Debt Funds Account for Half of European Leveraged Loans

In the U.K., private debt funds racked up a market share of almost 50% of mid-market term loans (those under €300 million in size) in the first half of 2018, according to advisory firm AlixPartners’ bi-annual mid-market debt report. When stretch senior deals were combined with unitranche loans, private debt funds provided 46% of loans in the U.K., the report reveals.

Sources credited the continued increase in debt funds’ market share to the maturity of the U.K. market, as well as the density and openness of sponsors operating there to non-bank lenders.

The total deal count for European debt funds in the first six months of 2018 hit 181, led by Ares (21 deals) and Tikehau (16 deals). That figure was down on the 203 deals racked up in the second half of 2017. On an overall European basis, unitranche deals increased their market share to 31% of all deals recorded, up from 27% in 2017, said the report. That proportion rises to 35% when super-senior and junior facilities are excluded.

Unlike the large-cap syndicated market, which has been dominated by M&A this year, the drivers for mid-market deals have remained extremely stable, according to AlixPartners. The proportion of leveraged buyouts (45%) and refinancings (24%) were the same in 1H18 as they were for full-year 2017. Add-on acquisitions increased marginally from 22% in 2017 to 25%, while dividend recaps fell to 6% in the first half of the year, from 8% in 2017. — Rachel McGovern

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US Leveraged Loans Return 0.40% In September, Trailing Only Equities YTD

us leveraged loan returns

U.S. leveraged loans returned 0.40% in August, down from a respectable 0.74% gain in July, as loan prices in the trading market slid once again, following a temporary reprieve, according to the S&P/LSTA Loan Index.

The relative softness in prices resulted from an increase in net supply of paper on offer to investors as a hefty slug of jumbo M&A credits wrapped up in the syndications market.

So far in 2018 U.S. leveraged loans have returned 3.32%, besting the other asset classes LCD tracks in its monthly analysis, with the exception of equities, which continue to outperform, returning nearly 10% so far this year.

High yield bonds, the asset class most closely associated with leveraged loans, have returned 1.93% so far this year.

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