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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

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Cov-relief, A-to-E activity remain slow in hot April loan market

 

 

 

 

 

 

 

 

 

 

 

Amendment activity was lackluster again in April. With liquidity running hot in the institutional market, amend-to-extend activity was limited to pro rata loans. Covenant-relief activity, meanwhile, remained slow. In all, four issuers loosened tests on $2.8 billion of leveraged loans, versus $5.8 billion in March.

This chart is part of an LCD News analysis available to subscribers. Other charts in that analysis:

  • Amend-to-extend volume
  • 2014 maturity wall


– Steve Miller

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Issuer’s market: Covenant-lite loan volume nears all-time record

covenant-lite loan volume

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.

Covenant-lite loans are those that have bond-like incurrence covenants, as opposed to more-restrictive maintenance covenants. Historically, as the leveraged loan market heats up and technicals shift in favor of issuers, cov-lite issuance grows. – Tim Cross

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Hostess term loan backing Apollo buyout gains on entry into trading mart

hostess logoAccounts yesterday received allocations of the $500 million covenant-lite term loan for Hostess Brands, which has advanced to a 100.5 bid after breaking for trading at 100/100.5, from issuance at 99, sources said. The seven-year loan is priced at L+550, with a 1.25% LIBOR floor. The loan is non-callable in the first two years, followed by 102, 101 call premiums in years three and four, respectively.

At 99, the loan yields about 7.12% to maturity. The yield tightens to 6.88% at the midpoint of the opening market.

Hostess, which is in the process of liquidating its assets and brands, is selling its snack-cakes business to Apollo Global Management and Metropoulos & Co. Apollo and Metropoulos’ $410 million bid for the unit was the stalking-horse bid, though according to a notice filed yesterday by Hostess with the bankruptcy court in White Plains, N.Y., the Apollo and Metropoulos bid was the “only qualified bid that was received by the debtors,” and that as a result, no auction would be held.

Prior to allocating the deal, Credit Suisse and UBS this morning added a ticking fee to the deal. It is set at zero basis points for the first 30 days, but would step up half of the drawn spread, or 275 bps, thereafter. A hearing to approve the sale is scheduled for March 19, and sources note the ticking fee was added to the deal in the instance there is an appeals process.

As reported, the arrangers last week cut pricing on the term loan, which was originally talked at L+600-625, with a 1.25% LIBOR floor and a 98.5 offer price. In addition, the loan was upsized by $50 million. The incremental debt is earmarked for general corporate purposes, which sources note could include a potential higher bid for Hostess Snacks, a reduction to the equity contribution, or a potential bid for snack-food business Drake’s.

The financing also includes a $60 million asset-based revolver. – Kerry Kantin/Chris Donnelly

 

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Twinkies, Ho-Ho’s New Home: Apollo, Metropoulos team for Hostess cakes biz, launching Wednesday

Credit Suisse and UBS are arranging financing backing the purchase of the Hostess Brands cakes business by Apollo and Dean Metropoulos, sources said.

A bank meeting is set for Wednesday as the issuer comes to market with a $450 million, seven-year covenant-lite term loan and a $60 million asset-based revolver.

Price talk and ratings have yet to emerge.

Commitments will be due on Friday, March 8.

The Hostess reorganization will see the bread business sold to Flowers Foods as Apollo and Metropoulos take the snack brands. Although purchase prices haven’t been announced, Hostess suggested in a bankruptcy court filing earlier this month that proceeds could top $1 billion. – Chris Donnelly

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More market resistance: Dematic drops plan to reprice covenant-lite leveraged loan

Dematic has withdrawn a proposed repricing of its covenant-lite term loan, sources said.

Credit Suisse had been shopping the deal at talk of L+325 with a 1-1.25% LIBOR floor and a par offer price, according to sources. The repriced loan would have included a 101, one-year soft call premium.

The B/B2 issuer’s $540 million covenant-lite term loan was placed in December. Proceeds backed AEA Investors and Teachers Private Capital’s acquisition of the global provider of warehouse technology and materials-handling solutions.

The seven-year term loan due December 2019 cleared the market at L+400, with a 1.25% LIBOR floor, and was issued at 99. Lenders would have been paid out at 101 had the repricing gone through, sources noted.

Credit Suisse, J.P. Morgan, and Barclays arranged the senior secured financing, which also included a $75 million revolver.

Also in support of the LBO, the company placed a $265 million issue of 7.75% notes due 2020, which priced at par via J.P. Morgan, Credit Suisse, and Barclays. The deal leveraged the company at 3.5x through the term loan and about 5.5x on a total basis, sources said at the time. – Chris Donnelly/Kerry Kantin

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Kinetic Concepts seeks to strip covenants from buyout loans

Kinetic Concepts has approached its lenders for an amendment to strip maintenance covenants from its term loans, according to sources.

The loan is currently governed by two maintenance covenants: total leverage and interest coverage, which are set at 8.25x and 1.15x in the current quarter, respectively. Under the terms of the amendment, the revolver would be governed by a springing-leverage test, sources note.

As well as stripping covenants, the company is looking to make other changes to the credit agreement, including reducing the excess-cash-flow sweep to 25%, from 50%, and revising certain baskets, sources said.

Bank of America Merrill Lynch is running the amendment, for which consents are due Friday, sources said. Lenders are offered a 15 bps consent fee.

The company is not seeking to change pricing on its loans. The medical-device company last tapped the loan market in November for a cross-border refinancing of its 2011-vintage LBO loans. A $1.1618 billion C-1 term loan due May 2018 is priced at L+425, with a 1.25% LIBOR floor; a $323 million C-2 term loan due November 2016 is priced at L+375, with a 1.25% floor; and a €248 million C-1 term loan due May 2018 is priced at E+450, 1.25% floor. All term loan tranches are covered by 101 soft call protection that rolls off in November.

Kinetic Concepts, which was acquired by an Apax Partners-led consortium in 2011, is rated B/B2, while the loans drew BB-/Ba2 ratings. – Staff reports