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July 2014 European Leveraged Loan Market Analysis – Video, Slides

This is S&P Capital IQ’s monthly loan market update. In this post, we concentrate on the trends at work in the European leveraged loan market during 2014 so far, including an increase in M&A financing and some signs of heating in the market. We’ll also touch on the question of whether some slowdown is to be expected.

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Out of the €45 billion of leveraged loan issuance so far this year, M&A-related deals contributed €25 billion, more than double what was raised in the first half of last year. This total was boosted by some jumbo corporate M&A deals, most recently  the cross-border financing for Jacobs Douwe Egberts. Among sponsor-backed buyouts, LCD tracked an increase in the number of asset sales by corporates and families, bringing some welcome debut borrowers to the loan market.

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Institutional investors continued to show strong appetite for leveraged loans during the second-quarter, and heavy repayments on existing loans spurred them on. In fact repayments reached a record quarterly high of €16.6 billion, based on the S&P European Leveraged Loan Index, as the chart shows.

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Adding to institutional demand, there was lively issuance of new-generation CLOs, particularly during June, including some new managers entering the 2.0 market, and sources say the pipeline for further CLO issuance in the second half of the year looks healthy.

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Through much of the year so far, there has been relatively little complaint from buyside firms about leverage multiples, and indeed first-lien leverage is pretty much flat on last year at around 3.7 times EBITDA. But second-lien tranches are appearing more frequently, and this helped drive total leverage a little higher, to 4.9x. Some arrangers argue leverage is unlikely to spiral up and up because this would result in deals coming to market with low single-B ratings, these often being hard to shift in syndication.

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Instead, the market is showing its aggression in other ways – particularly in the use of covenant-lite loans. €10 billion of cov-lite paper – a record – has been raised this year, meaning that roughly one in three euros sold to fund managers had no maintenance covenants. The ELLI Index now includes a 13% cov-lite portion, the highest in its history – although a long long way behind the U.S., where the trend started.

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However, from the point of view of yields, Europe looks less aggressive than it did earlier in the year as this chart suggests. Behind the scenes, yields on domestic European deals were flat from the first quarter to the second. But in line with the weaker technical picture in the U.S. market, cross-border yields widened in recent months, dragging the average out too.

Looking ahead, some kind of summer slowdown is likely, but arrangers say they are pitching on some aggressively structured deals and will be looking out for signs of pushback among investors if terms get too heated.

 

The video is available here.

The URL for the video:

PDF slides of the video on Slideshare is available here.

URL for the slides:

While you’re on YouTube please subscribe to LCD’s YouTube Channel. That way you won’t miss any LCD videos. You can also subscribe by clicking on the link to the right of any LCD News email.

– Ruth McGavin

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YouTube: June 2014 US leveraged loan market analysis (plus slides)

LCD’s video analysis detailing the US leveraged loan market during May is now on YouTube.

Loan prices rebounded during the month after April’s mini correction, a result of strong CLO issuance and slowing volume.

Looking to the summer, most players think the market will remain largely CLO-driven, with retail a slight drag on demand. Loan supply, meanwhile, is roundly expected to be lackluster. Though the M&A loan calendar remains within the recent range, some transactions are not expected to launch until the fall, and there are few blockbuster executions in the mix.

This month LCD looks at:

  • Average Bid of S&P/LSTA Loan Index
  • S&P/LSTA Index Loans Outstanding
  • Visible inflows
  • Average New-Issue Clearing Yields of First-Lien Loans
  • Loan Default Rate
  • M&A Institutional Loan Forward Calendar

The video is available here.

The URL:

Click here to download PDF slides of the video on Slideshare.

While you’re on YouTube please subscribe to LCD’s YouTube Channel. That way you’ll be certain not to miss any LCD videos. You can also subscribe by clicking on the link to the right of any LCD News email, or here:

http://www.youtube.com/user/LCDcomps

If you’d like to embed any LCD video on a web page or in other digital media, it’s simple via the “embed” button on the YouTube page for the video. You can also embed the slides via Slideshare.

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Leslie’s Poolmart (CVC) repriced leveraged loan enters trading above par

Leslies

Accounts on Friday received allocations of the repriced $610.5 million covenant-lite term loan for Leslie’s Poolmart, which broke for trading at 100.25/100.75, from issuance at par. The loan due October 2019 is priced at L+325, with a 1% LIBOR floor, with six months of soft call protection. Bank of America Merrill Lynch arranged the transaction, which cleared in line with original guidance. Via the transaction, the issuer is reducing pricing from L+400, with a 1.25% LIBOR floor, with two leverage-based step-downs; the existing deal is callable at par. The pool-supplies company is controlled by CVC Capital Partners.

Terms:

Borrower Leslie’s Poolmart
Issue $610.5 million term loan
UoP Repricing
Spread L+325
LIBOR floor 1%
Price 100
Maturity October 2019
Call protection six months 101 soft call
YTM 4.32%
Corporate ratings B/B3
Facility ratings B/B2
S&P recovery rating 4
Financial covenants none
Bookrunners BAML
Admin agent BAML
Sponsor CVC Capital Partners
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YouTube, slides: October 2013 US Leveraged Loan Market Analysis

LCD’s video analysis detailing the US leveraged finance market during September is now on YouTube.

With interest rates trending lower during the month loan returns trailed those of high-yield and other fixed-income categories, reversing the pattern of the prior four months, when 10-year Treasury rates were on the rise. Looking ahead, most participants think supply is more likely to ebb than to rise in the out months of 2013.

This month LCD looks at:

  • Leveraged loan volume
  • Average bid of S&P/LSTA loan 100 index
  • S&P/LSTA Index loans outstanding
  • Visible inflows
  • New-issue clearing yields of first-lien loans
  • Covenant-lite share of  new issue volume
  • High yield bond prices
  • Loan default rate
  • M&A institutional loan forward calendar

The video is available here.

The URL for the video:

PDF slides of the video on Slideshare are available here.

URL for the slides:

(If you’re reading this on lcdcomps.com the video is at the end of this story.)

While you’re on YouTube please subscribe to LCD’s YouTube Channel. That way you won’t miss any LCD videos. You can also subscribe by clicking on the link to the right of any LCD News email, or here:

http://www.youtube.com/user/LCDcomps

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Rue 21 loan backing Apax’s $1.1B LBO extends gains in secondary, rises to mid-80s

The $538.5 million covenant-lite term loan for Rue 21 has extended gains on the break, rising to an 84/85 market today, with one desk bidding as high as 86 for the paper, sources said.

The seven-year loan, which is priced at L+462.5, with a 1% LIBOR floor, was issued late yesterday at 81.5, and opened bid at 82.5. The gains in the paper come amid rangebound but quiet secondary market conditions today.

The loan, which backs Apax Partners’ $1.1 billion LBO of the fashion apparel retailer, is poised to close shortly. The accompanying $250 million bond bridge was never distributed and the notes remain unsold, although sources have speculated that a strong break into the secondary of the fully distributed term loan could open the door to a selldown of the unsecured debt.

The loan ultimately printed at a steep discount to par – albeit toward the tight end of a revised 80-82 range – after underwriters J.P. Morgan, Bank of America Merrill Lynch, and Goldman Sachs garnered additional commitments after circling it with a core group of investors after weeks of behind-the-scenes discussions. The financing commitment for the LBO also provides for a $150 million asset-based revolver.

The issuer is rated B-/Caa1, while the term loan is rated B-/B3, with a 4 recovery rating from S&P. Apax is purchasing Warrendale, Pa.-based Rue 21 for $42 per share. – Kerry Kantin/Chris Donnelly 

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BMC Software readies $4.55B leveragd loan backing LBO by Bain

bmc software logoA Credit Suisse-led arranger group has scheduled bank meetings for next week to roll out the approximately $4.55 billion covenant-lite loan backing the $6.9 billion leveraged buyout of BMC Software, according to sources. A meeting is scheduled for 2:00 p.m. EDT on Tuesday, July 30 in New York and for 2:00 p.m. BST on Monday, July 29 in London.

The senior secured component of the financing is structured as a $3.2 billion, seven-year term loan; a €750 million, or roughly $1 billion, seven-year term loan; and a $350 million, five-year revolving credit.

Ahead of the bank meeting, the dollar term loan is talked at L+400, with a 1% floor, offered at 99. Guidance on the euro loan is E+450, with a 1% floor, offered at 99. Both tranches would include six months of 101 soft call protection.

At the proposed guidance, the dollar loan offers a yield to maturity of 5.28%, while the euro loan would yield about 5.8%.

Credit Suisse, RBC Capital Markets, Barclays, Goldman Sachs, Deutsche Bank, Citigroup, Mizuho, Jefferies, BMO Capital Markets, HSBC, and UBS are arranging the financing. Commitments will be due on Thursday, Aug. 8.

The deal backs the purchase of BMC by Bain Capital and Golden Gate Capital, together with GIC Special Investments and Insight Venture Partners. As reported, the financing commitment for the LBO also provides for a $1.68 billion unsecured bridge loan, which is expected to be replaced with high-yield bonds.

Cash equity will total $1.25 billion, and the issuer will also utilize $1.4 billion of cash on hand.

Under the terms of the agreement, which was announced in May, affiliates of the investor group will acquire all outstanding BMC common stock for $46.25 per share in cash, or approximately $6.9 billion.

BMC Software provides business services and applications across distributed, mainframe, virtual, and cloud environments. For the four fiscal quarters ended March 31, 2013, BMC had revenue of $2.2 billion. – Kerry Kantin

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June 2013: US Leveraged Loan Market Analysis; Video, Charts

Through the first weeks of May, the loan-market’s 2013 rally persisted, however, loan prices eased about a quarter point in the last week of May. On the whole, the loan market has been resilient, bolstered by inflows from retail and institutional investors looking to loans as a way to hedge against rising rates. Looking ahead, participants expect tone in the HY market to remain a key driver of loan market conditions.

Reviewing the details:

 

 

 

 

 

 

 

 

 

 

Through the first three weeks of May, the loan-market’s virtually uninterrupted 2013 rally persisted. During the final week of the month, however, loan prices eased about a quarter point. The reason was twofold. For one thing, high-beta names came under selling pressure from high-yield accounts seeking to build cash in the teeth of outflows. For another, an increase in loan supply helped soak up some of excess liquidity that has long kept prices aloft. Thus, after generating a 0.50% return during the first 22 days of May, the S&P/LSTA Index lost 0.31% during the final 9 days of the month. All told, then, the Index eked out a 0.19% gain in May –  the smallest monthly advance in a year. Still, with the 10-year Treasury yield up about 50 bps in May, loans handily outperformed fixed-income products.

 

 

 

 

 

 

 

 

 

 

 

With CLO issuance still curtailed in May, visible inflows again fell short of the first quarter’s sky-high levels. In all, investors put $10.7 billion to work in the asset class in May, including $4.9 billion of new CLO prints and $5.8 billion in retail mutual fund subscriptions based on data from Lipper FMI.

 

 

On the other side of the technical ledger, the amount of S&P/LSTA Index loans outstanding increased $5.5 billion in May. But that was only the start. Owing to a slew of large M&A-driven executions in recent months, the backlog of new-money loans that have allocated but not yet funded into the index stood at $33 billion by the end of May, putting further pressure on loan prices.

 

 

The impact of the market’s late May swoon was felt mainly in the secondary. In the primary market, by contrast, clearing yields were largely stable with BB loans printed in a 3-3.5% band and single B’s in a 5.0% context. That said, managers were able to push back again some of the more aggressive transactions that launched in late May and early June.

 

 

Dividend financing was a major source of new primary product in May. Indeed, the amount of dividends financed by leveraged loans pushed to a record $7 billion during the month.

 

 

Turning to credit conditions, the default rate retreated to 1.4% in May from April in 1.9% and a 28-month high of 2.2% in March. Managers are constructive on the near-term outlook. On average, they expect the rate to tick up to 1.8% or so by December according to LCD latest buy-side poll taken in mid-March.

 

 

 

On the whole, the loan market has been resilient, bolstered by inflows from retail and institutional investors looking to loans as a way to hedge against rising rates.

As a result, the new-issue clearing yields have moved up only marginally in recent weeks.

Looking ahead, participants expect tone in the HY market to remain a key driver of loan market conditions.

 

A video of this presentation is available at:

http://youtu.be/XcFt7R3a7tM

Slideshare download is available at:

http://www.slideshare.net/lcdcomps/us-sld-shrjune2013v3f

– Steve Miller

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Asurion sets $850M term loan to refinance cov-lite deal

Morgan Stanley and Credit Suisse are launching an $850 million term loan for Asurion with a call at 11:00 a.m. EDT tomorrow, sources said.

Proceeds will refinance Asurion’s amortizing, covenant-lite first-lien term loan due 2017 and fund general corporate purposes, which may include – but are not limited to – refinancing the existing holdco loan, funding return of capital to shareholders and potential acquisitions, and paying related fees and expenses, sources said.

Asurion in February tapped the market for a $3.9 billion covenant-lite term loan due May 2019, which priced at L+325 with a 1.25% LIBOR floor, and includes one year of 101 soft-call protection.

Bank of America Merrill Lynch, Barclays, Credit Suisse, Deutsche Bank, Goldman Sachs, and Morgan Stanley arranged the loan, which cleared at the wide end of 99.5-99.75 guidance.

The $1 billion, 7.5-year unsecured holdco term loan is priced at L+950, with a 1.5% LIBOR floor. The loan, which was placed in February 2012, is non-callable for two years. The deal has a contingent cash-pay structure.

Asurion is rated B+/Ba3, while the first-lien loan is rated B+/Ba2. Standard & Poor’s has assigned a 3 recovery rating.

Asurion, which provides protection services for the wireless industry, is controlled by Madison Dearborn, Providence Equity Partners, and Welsh, Carson, Anderson & Stowe. – Chris Donnelly

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Covenant-lite outstandings grow as investor market clamors for loan assets

covenant-lite loan outstandings

As cash-rich institutional investors continue to flock to the leveraged loan asset class, issuer-friendly covenant-lite deals comprise an ever-growing share of loan outstandings, which now tops 35%, according to LCD, an S&P Capital IQ unit.

It’s no wonder cov-lite outstandings are piling up. Year to date, 56% of new -issue leveraged loans have been covenant-lite. That’s up from roughly 20% at this time a year ago and from negligible numbers during the dark days of the 2008-2010.

Cov-lite loans are more appealing to issuers in that include only less-restrictive, bond-like incurrence covenants, which require an issuer to be in compliance with the loan terms only if the issuer takes a specific action (making an acquisition, for instance). Traditional loans (covenant-heavy), on the other hand, have maintenance covenants, which require an issuer to be meet specific financial criteria at regular intervals, whether or not the issuer is undertaking a specific action.

You can read more about cov-lite deals here, at LPC’s free online Loan Market Primer.

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US Foods sets $2.1B covenant-lite leveraged loan

US Foods is launching today a $2.1 billion covenant-lite term loan. Citigroup has scheduled a lender call for US Foods for 11:00 a.m. EDT today for both new and prospective lenders, sources noted.

The term loan due March 31, 2019 will carry six months of 101 soft call protection. Price talk and use of proceeds will be outlined on the call.

The issuer last tapped the loan market in December 2012 with a $450 million fungible add-on to its covenant-lite extended term loan due March 2017, which is priced at L+425, with a 1.5% LIBOR floor, and is covered by a 101 soft call premium that lapses next month.

In June 2012, lenders holding about $1.24 billion of the issuer’s roughly $1.94 billion covenant-lite term loan extended their paper to March 31, 2017. The term loan dates to the 2007 LBO of the foodservice distributor, then known as U.S. Foodservice, by Clayton Dubilier & Rice and Kohlberg Kravis Roberts & Co. Corporate ratings are B/B3. The secured debt is rated B-/B3, with a 5 recovery rating. – Staff reports