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Video: Leveraged loan volume, pricing in spotlight as M&A supply dominates

In the latest Capital Markets View video, LCD’s Luke Millar and S&P Global’s Chris Porter cover the main trends in European leveraged loans, including supply and pricing. Discussed this month:

  • Overall sponsored finance volume is down on the same period last year, though loan supply recovered a little in February. The leveraged finance market could be set for lumpy issuance throughout the year.
  • Supply has been dominated by M&A- and LBO-related issuance so far in 2019 — meaning investors have been served up some new-money paper — though recaps have also been seen recently from Ceva Sante Animale and HotelBeds.
  • Trade players have been flexing their muscles too, as Berry Group outbid Apollo for RPC, and Amer Sports also went to a trade buyer.
  • Leverage is creeping up on loan deals, but the buyside maintains it prefers transactions that carry higher leverage for a strong credit, to those from a weak company levered at 4.5–5x.
  • Market expectations coming into the year were for TLB spreads of 425–450 bps, but instead they have fallen to a 400 bps context. This could indicate managed accounts are the dominant players, as such pricing is sub-optimal for CLO managers focused on the arbitrage.
  • Indeed, CLO liability spreads are higher than at the end of last year, thereby putting the arbitrage under pressure. Note, the European CLO volume and deal count is running slightly ahead of the year-ago period.
  • CLO demand for loans remains strong, with managers adding more risk to maintain the blended spread on assets. They are also getting creative with deal structures this year — for example, some transactions have not included any B rated paper in the stack.
  • Downward flexes dominate the batch of loan deals to see price changes in syndication so far this year, indicating the current strength of demand and an issuers’ market. That said, the buyside is pushing back on docs and getting some movement here, perhaps emboldened by scrutiny on the asset class from central banks and the mainstream press.

The URL for the video: https://www.spratings.com/en_US/video/-/render/video-detail/capital-markets-view-march-2019

Luke Millar is European Editor at LCD. Chris Porter is Head of Loan Recovery & CLO Business Development, S&P Global.

Please feel free to contact Chris if you’d like a particular topic discussed in next month’s video.

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With rate-hike chances slim, leveraged loan issuers turn to high yield bond market

Borrowers are issuing fixed-rate high-yield bonds to take out floating-rate leveraged loan debt at the fastest pace since the first quarter of 2017.

Through March 14, completed bond-for-loan takeout offerings in 2019 have totaled $11.9 billion, according to LCD. With the inclusion of ADT’s pending offering, expected to launch this month, this figure edges to $12.4 billion.

The renewed emphasis on the fixed-rate high-yield asset class, at the expense of floating-rate leveraged loans, is clear via retail investor activity. So far in 2019 U.S. high-yield funds have seen a net inflow of $8.2 billion, while U.S. loan funds have seen a net withdrawal of roughly the same amount, according to Lipper weekly reporters.

Notably, retail investors have pulled money from loan funds for the past 17 weeks, totaling nearly $22 billion.

Before the recent retail retreat from the U.S. leveraged loan market, interest rates had been rising, benefiting the floating rate asset class. Market observers do not expect another rate hike in 2019, according to CME group. — Jakema Lewis

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Private equity stalwart Lee, leveraged loan vet Gleysteen team for AGL, with eye on CLO mart

AGL Credit Management is a private credit firm specializing in bank loans that has been launched by Peter Gleysteen, who will serve as both the Chief Executive Officer and Chief Investment Officer, as well as Thomas H. Lee, who will be a non-executive chairman.

AGL also intends to build out a CLO franchise, joining other firms that recently established a platform, including Elliott Management; HalseyPoint Asset Management; and LibreMax, through its acquisition of Trimaran Advisors.

The Abu Dhabi Investment Authority (ADIA), the sovereign wealth fund managing around $800 billion, and an unnamed U.S. state pension fund have committed $650 million in equity for AGL Credit, in addition to the family office of Thomas H. Lee, who has also made an investment.

Gleysteen had previously founded CIFC Asset Management, the now $13 billion credit manager where he was CEO from 2005 to 2014.

Lee is a Chairman at Lee Equity Partners and was previously the Chairman and CEO of Thomas H. Lee Partners, which was established in 1974 and has since invested over $10 billion across 100 different transactions. – Andrew Park

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SS&C Technologies ups $750M high yield bond offering to $2B

SS&C Technologies has priced $2 billion of 8.5-year unsecured notes at the tight end of talk, sources said. The offering was upsized from $750 million, and marketed via joint bookrunners for the deal were Morgan Stanley, Credit Suisse, Citi, BAML, and Oppenheimer. Proceeds will be used to repay a portion of existing term loans under the company’s senior secured credit facilities. S&P Global Ratings views the transaction as leverage neutral. SS&C Technologies (Nasdaq: SSNC) provides software products and software-enabled services to financial services providers. Terms:

Issuer SS&C Technologies
Ratings B+/B2
Amount $2 billion
Issue Senior (144A/Reg S for life)
Coupon 5.5%
Price 100
Yield 5.5%
Spread T+291
Maturity Sept. 30, 2027
Call non-call three (first call @ par +75% coupon)
Trade March 14, 2019
Settle March 28, 2019 (T+10)
Joint bookrunners MS/CS/C/BAML/Oppenheimer
Talk 5.5-5.75%
Notes Upsized frpm $750 million; up-to-40% equity claw @ 105.5 until March 30, 2022; make-whole @ T+50; change of control put @ 101

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US Leveraged Loan Funds See $606M Withdrawal as Outflow Streak Hits 17 Weeks

Retail investors withdrew $606 million from U.S. loan funds during the week ended March 13, the seventeenth straight outflow for a total of $21.8 billion over that span, according to Lipper.

The withdrawal is the largest in four weeks, halting a short trend of dwindling outflows, including a small $33 million retreat two weeks ago.

Mutual funds were the main culprit this week, with a $503 million net outflow, while loan ETFs saw a $103 million withdrawal. The change due to market conditions during the week was a negative $125 million. The four-week average is now a $410 million outflow.

Year to date, including the week ended Jan. 2, retail investors have withdrawn a net $8.3 billion from U.S. loan funds (that’s nearly the opposite number for U.S. high-yield funds, which so far in 2019 have booked a net inflow of $8.2 billion, by the way).

Assets at the loan funds now total $86 billion, of which $10 billion come via ETFs, according to Lipper.

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Frontier Communications talks pricing on $1.65B secured high yield offering

Frontier Communications (Nasdaq: FTR) has set talk for a $1.65 billion offering of eight-year (non-call three) first-lien secured notes in the 8% area, sources said. Books for the deal were set to close today.

Bookrunners for the deal are J.P. Morgan, Citi, Credit Suisse, Goldman Sachs, Morgan Stanley, Barclays, Bank of America Merrill Lynch, Deutsche Bank, and Mizuho. Initial price thoughts circulated at 8–8.25%, sources noted. These new notes will serve as the issuer’s inaugural first-lien, fixed-rate print.

Proceeds are earmarked to repay $1.4 billion and $239 million outstanding A term loan facilities due in 2021. Additionally, the borrower also intends to extend the maturity of at least $835 million of its $850 million revolving credit facility by two years, from 2022 to 2024.

Analysts at research firm CreditSights on March 12 noted that while the refinancing will “materially improve Frontier’s runway through 2021,” the company’s interest expense could increase by $30–40 million per year pro forma for this refinancing, and the issuer’s 7.125% senior notes due 2019, which CreditSights expects will be repaid using a mix of revolver borrowings and cash on hand.

Ratings have been assigned as B/B2, with a 1 recovery rating from S&P Global Ratings. Analysts at S&P Global Ratings view the transaction as leverage-neutral, but maintain a negative outlook at the borrower on expectations it “will be unable to address its longer-dated unsecured debt maturities when they come due absent favorable business, economic, and financial conditions because of its lack of secured debt capacity, low free operating cash flow, and elevated leverage,” a March 12 report noted. Moody’s has a stable outlook for the company.

Frontier Communications is a Norwalk, Conn.–based provider of communications services, offering data, video, and voice packages for residential and business customers. As of Dec. 31, 2018, total debt at the company was $17.2 billion, according to S&P Global Market Intelligence. — Jakema Lewis/Nina Flitman

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US high yield funds see $1.9B withdrawal, snapping inflow streak

Retail investors pulled $1.9 billion from U.S. high-yield funds in the week ended March 6, putting an abrupt end to five weeks of inflows totaling $5.6 billion, according to Lipper.

With the recent activity, the four-week average dips to a $49 million outflow, from a $1.4 billion inflow last week.

ETFs took the bigger hit, with a $1.3 billion outflow, according to Lipper weekly reporters. High yield mutual funds saw $582 million of withdrawals. The change due to market conditions was positive $224 million during the week.

Since the first full week of January, net inflows to U.S. high yield funds total $7.8 billion. Assets at the funds stand at $199 billion, $43 billion of which come via ETFs. — Staff reports
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European Leveraged Loans Return 0.67% in February

The European secondary loan market continued to rally in February as the S&P European Leveraged Loan Index (ELLI) returned 0.67%, bringing the year-to-date gain to 1.41%. This is the second-strongest return recorded for the January to February period in six years, falling just one basis point behind the same period in 2017, and roughly double the 0.68% posted at this time last year.

Of course, the strong gains in the last two months follow equally strong losses in November and December. To put the recent swings in performance into perspective, European loans gained an average of 18 bps in the last 12 months, and an average of 22 bps in the last 24 months. – Marina Lukatsky

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US CLO Issuance Tops $13B in February

Following an active February, with over $13 billion in U.S. CLO issuance, many  managers are still finding different avenues to work their way out of their warehouses, some of which are still underwater despite the ongoing recovery in loan prices from December (Through the first two months of 2019 U.S leveraged loans returned 4.18%).

Year to date, U.S. CLO issuance totals $18.79 billion, compared to $21.37 billion at this point last year, according to LCD. Of course, 2019 finished with a record $128.9 billion in issuance.

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After Torrid January, US Leveraged Loans Return 1.59% in February

U.S. leveraged loans returned 1.59% in February, their second straight strong performance after a dismal December, when the segment lost 2.54% amid a veritable risk-off rout of the asset class, according to LCD.

Through the first two months of 2019 U.S. loans returned 4.18%, their best start to a year since 2009, the first full year after the financial crisis.

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