After a record-setting first quarter, CLO issuance has downshifted noticeably. Indeed, during the four weeks ended May 15, CLO volume averaged $897 million per week, less than half the $1.9 billion weekly issuance seen in January and February. Year-to-date CLO issuance now totals $32.1 billion
The reason for the recent slowdown is three-fold:
Managers pulled forward a fair amount of CLO activity from April to March to beat the FDIC rule that mandates that banks apply higher capital requirements to AAA CLO paper
Tightening collateral spreads that result in thinning equity arbitrage
This analysis is part of an LCD News story, available to subscribers, that also details
Average CLO liability/new-issue asset spreads
Premium: blended new-issue spread vs. weighted average liabilities cost
Loan issuance was €6.7 billion in April 2013, while high yield issuance was €6.5 billion.
According to JP Morgan HY research: estimated inflows into European HY funds was €543 million for April. This brings year-to-date inflows at €2.9 billion.
Secondary markets were up, loan markets went up 72 bps points to finish the month at 100.58 while high yield markets were up 206 bps to finish the month at 104.63.
The S&P European Leveraged Loan Index (ELLI) finished the month up 0.88%.
Default rates stayed level.
Focusing on the secondary loan market, this chart details the average price of LCD’s European Loan flow name composite – a measure of the 12 largest, most liquid loans (consisting of 10 issuers) – since 2002.
Secondary loan prices rose 72 bps to finish the month at 100.58. The increase brings the average flow names up to a fresh peak since the beginning of July 2007. Since bottoming out at 60.23 at the end of 2008, the average has now recovered to pre-crisis levels, having added more than 40 points over the last 52 months. The current bid is now 324 bps higher than the final reading of 2012.
This next chart details the average price LCD’S European High Yield Flow name composite – a measure of the 12 most liquid high yield issues – since the beginning of the year 2010.
The high yield market finished the month at up 206 bps at 104.63, just 3 basis points shy of the 2013 high of 104.66 . The average bid is now 167 bps higher in the year to date, having ended 2012 at 102.96.
This chart details the monthly return of the ELLI, a broad measure of European loan market returns that LCD calculates. All returns are ex-currency unless otherwise stated.
The European loan market had a positive return of 0.88% for the month of April (for the week ending May 2nd), down from the 0.91% seen in March . This brings the year-to-date return to 3.50% versus 5.19% for the same period last year.
Now we turn from the secondary to the primary. This graph details new-issue volume for both leveraged loans and high-yield bonds.
April’s leveraged loan new-issue launch pad remained very similar to the prior month’s, consisting of a wave of opportunistic transactions with a tiny dash of buyouts. Out of the €6.7 billion total volume for the month, €5.7 billion came from refinancings, led by the jumbo €2.7 billion pro rata facilities for Schaeffler, and the €1.5 billion TLH and TLE-1 for Kabel Deutschland. April’s high-yield bond tally reached €6.5 billion, falling a tad short of the roughly €7 billion total seen in each of the prior months. However, this reading by no means signifies a slowdown in issuance, as close to €2 billion of bonds priced in the first two days of May. For the year to date, European borrowers raised €27.8 billion in the high-yield bond market, more than double the €13.5 billion seen at this time last year, and just €8.5 billion away from the full-year tally for 2012. If issuance continues at the same pace for the remainder of the year, 2013 can easily smash the 2010 record of €44.4 billion.
The default rate by principal amount stayed level at 5.9% at the end of April while the default rate by issuer count fell to 7.1% at the end April from at 7.2% at the end of March.
Themes to watch for going forward
CLOs emerge back on the landscape, according to LCD reports, there are 4 vehicles in the pipeline totaling €1.4 billion consisting of vehicles from Alcentra, Blackstone / GSO, Carlyle and ICG. So far this year, 3 vehicles have priced for a total of €964 million from managers Apollo, Cairn and Pramerica.
Further spread / yield compression is expected, as loan issuers use access to the high yield markets to reduce existing spreads.
Along with repricings, some sponsors are tabling dividend recap deals to take advantage of investor demand, both in loans and high yield.
Still strong demand for high yield bonds, so far this year, net inflows stand at €2.9 billion.
Bond for loan-take-outs will continue to keep pace as issuers address their maturity concerns.
Over the past week, the pipeline of CLOs in various stages of the rating process but for which final ratings have not yet been assigned increased to $13.73 billion, from $11.58 billion last week, according to a report from S&P’s Structured Finance Ratings Group.
All told, S&P expects $30 billion of new vehicles to close based on deals in the pipeline, versus $27 billion last week. On the other side of the ledger, optional redemptions for CLOs based on notices received by S&P now stand at roughly $10 billion, which is unchanged from last week.
Headline CLO statistics (May 14):
MTD issuance: $1.9 billion from four managers, versus $1.1 billion from three managers from April 1-14
YTD issuance: $32.1 billion from 59 managers, versus $11.6 billion from 25 managers in the year-ago period
LTM issuance: $74.4 billion from 83 managers, versus $21.9 billion from 35 managers in the 12 months ended May 14, 2012
This analysis is part of an LCD News story, available to subscribers, that includes the PDF from S&P detailing U.S. CLO closings and optional redemptions.
An excess of demand marked the April market, with no signs of the supply/demand equation changing. Retail and institutional investors continue to embrace the asset class. CLO issuance has downshifted, however. Looking ahead, participants expect loans’ positive bias to persist.
Reviewing the details:
Positive investor sentiment combined with an excess of demand over supply pushed the average price of S&P/LSTA Index loans up a quarter-point to a fresh post-credit-crunch high of 98.4 cents on the dollar in April. In response, the Index gained 60 bps during the month, bringing loan returns for the first four months of the year to 2.7%.
Visible inflows were mixed in April. On the one hand, CLO retreated to a nine-month low of $3.9 billion after touching a six-year high of $10.7 billion dollars in March. On the other hand, inflows into mutual funds remained robust at an estimated $6.5 billion based on data from Lipper FMI.
While down from March, inflows handily exceeded supply. In all, the amount of S&P/LSTA Index loans outstanding increased $2.6 billion in April. That suggests a demand surplus of $8 billion.
Given these technical trends, it’s not for nothing that new-issue clearing yields tightened further in April. BB loans printed in a 3% context and single B’s in a 4.5-5.0% band.
With paper printing at the lowest yields in recent memory, issuers uncorked $37 billion of institutional loan repricings, pushing the total for the first four months of the year to $156 billion, or 28% of the S&P/LSTA Index. If you are keeping score at home, the average spread reduction on the loans in question was roughly 150 bps.
Turning to credit conditions, the default rate eased in April to 1.9% after reaching a 28-month high of 2.2% in March. Managers are sanguine about the near-term outlook. On average, they expect the rate to inch to 1.8% or so by December according to LCD latest buy-side poll taken in mid-March.
Participants expect loans’ positive bias to persist.
Arrangers say front-end LBO activity is still lackluster, suggesting supply will continue to lag in months ahead, though there are some green shoots for the third quarter.
Loan demand, meanwhile, shows no signs of waning. Retail and institutional investors continue to embrace the asset class. CLO issuance, however, has downshifted, if only because collateral is scarce and, therefore, equity arbitrage has thinned.
In April, demand for loans again outpaced supply, adding further fuel to the market’s technical fire, which has led to plunging yields on new-issue loans (among other things).
All told, visible capital – including estimated retail inflows and CLO formation – exceeded net new supply during the month by $7.8 billion: $10.4 billion to $2.6 billion. That padded the year-to-date surplus to a super-sized $37.8 billion ($51.7 billion to $13.9 billion), or a still-formidable $28.3 billion including Heinz’s allocated but yet-to-be-funded $9.5 billion institutional LBO loan.
The cash-rich leveraged loan institutional investor market saw another $1.4 billion in inflows via U.S. CLO issuance over the past week, bringing the year-to-date CLO total to $31.6 billion from 64 deals (that’s a $493 million average deal size).
The weekly total is healthy compared to recent weeks (indeed, there were no vehicles issued the week ended April 24), but lags the torrid pace set during March.
The largest CLO this week was a $507 million vehicle for Benefit Street Partners (Providence Equity). The others: a $413 million deal for Neuberger Berman and a $490 million vehicle via Babson Capital.
Looking forward, it appears CLO activity will carry on, at least in the near term. There are some $11.6 billion of CLOs in various stages of the ratings process, but which have not yet received final ratings, according to S&P’s Structured Finance Ratings Group.
High-yield funds increased their exposure to leveraged loans during the back half of 2012, based on a review of 20 large open-end and closed-end loan funds by LCD.
The funds under review grew loans to, on average, 8.3% of assets under management during the reporting period ended Dec. 31, 2012, or Feb. 28, 2013, from 7.5% six months earlier. All told, the share of loans is up two percentage points over the past two years.
Applying this increase to the entire universe of high yield funds – which now stands at $293 billion in the U.S. according to Lipper – suggests that these players have increased their loan book by as much as $12 billion, to $24 billion, since late 2010, when total high yield AUM stood at $193 billion.
This analysis is taken from an LCD News story, available to subscribers, that also details
Relative value players’ share of primary loan market (chart)
Covenant-lite loan volume in the U.S. so far in 2013 has topped levels seen during all of 2012, and is fast approaching the full-year record set in the pre-Lehman market of 2007, according to S&P Capital IQ/LCD.
Year-to-date cov-lite loan volume stands at $93.5 billion, as issuers and private equity firms rush to take advantage of an accommodating institutional investor market that is sitting atop a seemingly ever-growing mountain of cash.
The full-year covenant-lite loan total for 2012 was $86.7 billion. The record annual volume is $96.6 billion, in 2007.
About that investor cash. Net inflows into loan mutual funds and ETFs have totaled nearly $16 billion so far this year, riding a 44-week streak of inflows, according to Lipper FMI. CLOs have played a major role here, as issuance in that market has boomed so far in 2013 after being left for dead after the 2008-09 financial markets collapse.
While cov-lite activity is eye-popping – these deals comprise more than half of all first-lien leveraged loans completed so far this year – it should be noted that the bulk of loan market activity in 2013 has been straightforward repricings/refinancings, as opposed to more high profile M&A/LBO deals.