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Europe CLO Market Kicks Off 2019 with €509M Deal

Europe’s first collateralized loan obligation vehicle of the year priced on Friday. Barclays printed an upsized, €509 million CLO for Credit Suisse Asset Management. The triple-A tranche of debt priced wider than the last anchored deals of 2018. The deal was upsized by roughly €100 million.

Activity in Europe’s CLO new-issue market should continue to pick up considerably, as details of four new deals emerged last week from CELF Advisors, Guggenheim, ICG, and Blackstone/GSO, with the latter also releasing price guidance today.

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

The special-purpose vehicle is financed with several tranches of debt (typically a ‘AAA’ rated tranche, a ‘AA’ tranche, a ‘BBB’ tranche, and a mezzanine tranche) that have rights to the collateral and payment stream, in descending order. In addition, there is an equity tranche, but the equity tranche usually is not rated.

CLOs are created as arbitrage vehicles that generate equity returns via leverage, by issuing debt 10 to 11 times their equity contribution.

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Free Webinar: Global High Yield Markets Opportunities, Pitfalls in 2019

webinar imageS&P Global Market Intelligence and LCD are excited to present on Tuesday, Jan. 29 a complimentary webinar on the  global high yield market: Opportunities and Pitfalls in 2019.

You can register for the event here.

Topics covered in this webinar include

  • An overview of 2018 U.S. high yield performance
  • Historical perspective on the late 2018/early 2019 downturn
  • Is the distress ratio signaling a recession? How reliable is this predictor?
  • Deal flow in the face of rising credit risk: 2019 outlook in the U.S. and European high yield markets
  • Risks and opportunities in today’s global high yield market
  • Ratings performance
  • Multi-notch downgrades
  • Fallen angel risk
  • Distressed and default outlook

Date
Jan. 29, 2019

Time
10-11 am EST

Speakers

Marty Fridson
CIO
Lehmann, Livian, Fridson Advisors LLC

Diane Vazza
Managing Director, Head of Global Fixed Income Research
S&P Global Ratings

  Nicholas Kraemer, FRM
  Senior Director, Global Fixed Income  Research
S&P Global Ratings

John Atkins
Director, Leveraged Commentary & Data
S&P Global Market Intelligence

Luke Millar
Director
S&P Global Market Intelligence

Ruth Yang
Managing Director, Leveraged Commentary & Data
S&P Global Market Intelligence

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After Deal-Free December, US High Yield Bond Issuance Takes Off

Following a rare month with no U.S. high yield debt issuance – which exacerbated a broader downturn in U.S. high-yield primary volume over the tail-end of 2018 – speculative-grade bond issuers are moving off the sidelines against a steadier financial-markets backdrop, capitalizing on pent-up investor demand for fresh prints and the resulting improvement in their pricing leverage, LCD data shows.

The week ended Jan. 25 was on track to produce the largest new-issue market weekly volume since early-August 2018, with more than $6 billion in supply slated to clear. The lion’s share—$4.2 billion—was priced in a single session, which saw each transaction upsized, and finalized with an issuer-friendly yield. A strong appetite for new debt helped reverse a wave of price widening recorded for the U.S. arm of the asset class during the final quarter of 2018, which saw buysiders and issuers alike proceed with caution among price slides in equities and crude oil, large outflows from high-yield funds, and increasing trade tensions.

Tenet Healthcare on Jan. 22 raised $1.5 billion of 6.25% secured second-lien notes due 2027 at the tight end of talk, after doubling the size of its deal, and Vistra Energy printed $1.3 billion (up from $700 million) of 5.625% notes due 2027, at the midpoint of circulated guidance. That same day, Albertsons Cos, boosted its pitch by $100 million, selling $600 million of 7.5% notes due 2026, and MGM Growth Properties placed $750 million of 5.75% notes due 2027, after upping the offering size from $500 million. Both transactions cleared at the tight end of guidance.

So far in January, no deals were printed at the wide end of price guidance or outside of the announced talk range, an indicator of healthy market demand. Six of the 10 deals were priced at the firm end of guidance, with the balance printed at the midpoint of talk.  

In contrast, in the fourth quarter, just 38% of the new issues cleared syndicate at the firm end of price talk ranges. Five issues priced at the wide end of talk or outside the announced range, accounting for nearly one-quarter of the total offerings. – Jakema Lewis/John Atkins

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As leveraged loans gobble up market share, all-important debt cushion grows thin

debt cushion

Two straight years of unprecedented leveraged loan issuance by U.S. corporations and private equity shops – often at the expense of the fixed-rate high yield bond market – has whittled away the subordinated debt tier that can buoy recoveries for investors in cases of default.

Indeed, in 2018, a staggering 79% of U.S. speculative-grade debt issuers last year obtained financing solely from the reliably accommodating syndicated loan market (as opposed to structuring a deal with both loans and bonds). That’s the highest reading since LCD began tracking this data in 2007, and is up from 70% in 2017.

With the recent activity, the share of the currently outstanding leveraged loan universe – $1.15 trillion – comprising a loan-only structure has grown to a record 27%, according to LCD. This evaporation of the subordinated debt cushion matters.

As LCD detailed in its recent recovery study, the bigger the debt cushion in a deal’s capital structure, the better the recoveries for debtholders in cases of default (the cushion is calculated as the share of total debt that is subordinated to the instrument being assessed).

For example, for loans with a very substantial debt cushion (more than 75%), the average discounted recovery was 94%, according to LCD’s analysis of data tracked by LossStats. The lower the cushion, the lower the recovery. A cushion of 26–50% resulted in an average recovery of 73%, for instance.

Of course, recoveries and leveraged loans have been topics of considerable interest lately as loosely structured covenant-lite issuance has taken full root in the loan market, and amid signs that an already aged credit cycle might be coming nearer to an end.

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S&P: Leveraged Loan Recoveries Have Dipped While High Yield Increases

Since 2010, post-default recoveries for U.S. bank debt have often been below their long-term averages, even as bonds have experienced elevated recoveries. Financing conditions have been favorable to highly leveraged companies, with investor demand for leveraged loans supporting growing issuance, tightening spreads, and debt structures with smaller debt cushions and fewer covenant protections.

These favorable conditions have helped support bond recoveries in recent years, as has the prevalence of distressed exchanges, which have tended to benefit the recoveries of bonds rather than loans. These factors could contribute to shrinking recoveries once default rates rise.

In short:

  • Average recovery rates for bank debt (which includes term loans and revolvers) have fallen by two percentage points since 2010, to 72%, as declining recovery rates for second-lien term loans have weighed on term loans overall.
  • In contrast, bonds and notes have experienced above-average recoveries of 51% over the same period as the prevalence of distressed exchanges has supported bond recoveries.
  • The long-term discounted average recovery for bank debt is 73.9%, while bonds and notes have recovered 39.2%, on average.
  • For first-lien term loans, shrinking debt cushions, an increase in covenant-lite, and rising leverage are likely hampering recoveries, and this trend could become more pronounced for recoveries of senior and subordinated debt when the cycle turns.

This analysis is courtesy LCD’s colleagues at S&P Global Fixed Income Research, Diane VazzaNick W. Kraemer, and Evan M. Gunter. The complete analysis is available here.

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Retail investors pour massive $3.3B into US high yield funds/ETFs

U.S. high yield funds and ETFs saw a $3.28 billion inflow of investor cash during the week ended Jan. 16, the largest for the investor segment since December 2016, according to Lipper weekly reporters. The gain follows up on a $1 billion inflow the previous week, bringing the YTD number to a $3.7 billion net inflow.

The activity was evenly split during the week, with funds seeing $1.57 billion of inflows while ETFs saw $1.7 billion.

With the recent surge, the trailing four-week average is a $58.3 million outflow, down considerably from $1 billion a week ago. The change due to market value was plus $475 million.

Assets at U.S. high yield funds now stand at $190.5 billion, of which $41 billion come via ETFs.

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US Leveraged Loan Maturity Wall – Nothing to See Here (until 2023)

With the U.S credit market creaking loudly in December – before rebounding somewhat in January –  leveraged loans once again were thrust into the spotlight, with observers citing loosening underwriting standards and the massive amount of outstandings as areas of special interest.

While those are legitimate concerns, the defaults that can mount as credit cycles deteriorate might have to wait a while this time around.

While the U.S. leveraged loan market now totals some $1.15 trillion in outstanding debt, relatively little of it will come due over the next few years, as borrowers have taken full advance of an accommodating market in 2017 and 2018 to lock in thinly priced debt.

Indeed, this year there’s but a scant $8 billion of U.S. leveraged loans that will mature, according to LCD. That number was roughly $44 billion as of December 2017, though refinancings and repricings reduced that amount dramatically.

Loan maturities step up a bit in 2020, to $25 billion, and to $69 billion in 2021. But it’s not until 2022 when maturities really start to kick in, with $118 billion due. Maturities peak in 2025 – seven years from now, or the length of some credit cycles – when there is $351 billion due.

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Targa Resources Inks $1.5B High Yield Bond Offering

Targa Resources Partners has completed a $1.5 billion, evenly split, two-part offering of senior notes via lead Bank of America Merrill Lynch, sources said. The originally proposed 8.5-year bonds priced at the tight end of talk, while the 10-year maturity, which was added following strong investor demand and upsized by $250 million, priced at the middle of talk. The transaction ended a dry spell for U.S. high-yield issuance, which saw a print-free December 2018 due to an extended wave of market volatility.

Proceeds are earmarked for the full redemption of the issuer’s outstanding 4.125% notes due 2019, and for general partnership purposes, which may include repaying borrowings under its credit facilities or other debt, working capital, and funding growth investments and acquisitions. The issuer had last come to market in April 2018, when it placed $1 billion of 5.875% notes due 2026. Targa Resources Partners LP, a subsidiary of Targa Resources (NYSE: TRGP), owns, operates, acquires, and develops midstream energy assets in the U.S. – Jakema Lewis

Issuer Targa Resources Partners
Ratings BB/Ba3
Amount $750 million
Issue Senior (144A/ w. contingent reg. rights)
Coupon 6.5%
Price 100
Yield 6.5%
Spread T+381
Maturity July 15, 2027
Call non-call 3.5 (first call @ par 75% coupon)
Trade Jan. 10, 2019
Settle Jan. 17, 2019 (T+5)
Joint bookrunners BAML/JEFF/WF/CAPONE/GS/TD
Co-lead managers ABN/BBVA/ING/MUFG/Scotia/SMBC
Co-managers BB&T/BMO/CIBC/Citizens/FifthThird/USBank
Talk 6.625% area
Notes Make-whole  @ T+50; change of control put @ 101; up-to-35% equity claw @ 106.5 until Jan. 15, 2022
Issuer Targa Resources Partners
Ratings BB/Ba3
Amount $750 million
Issue Senior (144A/ w. contingent reg. rights)
Coupon 6.875%
Price 100
Yield 6.875%
Spread T+415
Maturity Jan. 15, 2029
Call non-call 5 (first call @ par +50% coupon)
Trade Jan. 10, 2019
Settle Jan. 17, 2019 (T+5)
Joint bookrunners BAML/JEFF/WF/CAPONE/GS/TD
Co-lead managers ABN/BBVA/ING/MUFG/Scotia/SMBC
Co-managers BB&T/BMO/CIBC/Citizens/FifthThird/USBank
Talk 6.875% area
Notes Upsized from $500 million; up-to-35% equity claw @ 106.875 until Jan. 15, 2022

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Outflows from US Leveraged Loan Funds, ETFs Ease from Recent Peaks

Retail outflows from U.S. loan funds eased to $327 million for the week ended Jan. 9, putting an end to a seven-week run of $1 billion-plus withdrawals, highlighted by a record $3.5 billion outflow two weeks ago, according to Lipper.

With the recent activity, the four-week trailing average moderates to a still-severe $2.37 billion outflow, from $2.9 billion last week.

Mutual funds were behind the outflow this week, with a $464 million withdrawal, while ETFs saw a $137 million net inflow, the first for that segment of the investor base since Dec. 5, according to Lipper weekly reporters.

Of note, the change due to market value was positive $2.2 billion this week, far and away the largest that figure has been. (For the record, U.S. leveraged loans have gained some 2.5% over the past week, according to the S&P/LSTA Loan Index.)

Year to date, U.S. loan funds and ETFs have seen $2.65 billion of outflows, with the current eight-week run of withdrawals totaling $16.1 billion.

Assets at U.S. loan funds now total $90.5 billion, of which $10.7 billion come via ETFs. — Tim Cross

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European Leveraged Loan Market Hits Record Size in 2018

The European leveraged loan market grew by €2.5 billion in December, bringing the asset class to a record  €181 billion at year-end, from €178.5 billion in November, according to LCD’s European Leveraged Loan Index (ELLI).

While issuance of new leveraged loans stalled in December, the Index grew, as a number of November launches allocated and joined the ELLI.

Overall, the size of the invested institutional market increased by 30% during 2018, as tracked by the ELLI, on the back of strong supply of M&A-related loans. Institutional new-issue volume for this purpose rose to a post-crunch high of €57.7 billion last year — up from €41.6 billion in 2017, and above the roughly €30 billion average between 2014 and 2016, according to LCD.

Opportunistic transactions such as refinancings and recaps declined significantly in 2018, to just €19.6 billion, from the €58.5 billion record-high tracked in 2017. Moreover, roughly 70% of the 2018 tally came from the first half of the year. – Marina Lukatsky

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