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US Leveraged Loan Default Rate Rises to Still-Low 1.62% in February

The default rate of the S&P/LSTA Leveraged Loan Index climbed to 1.62% in February, from a 17-month low of 1.42% in January, after Windstream Holdings and Ditech filed petitions for bankruptcy protection in the Southern District of New York.

By issuer count, the default tally is now 1.52%, up from a 15-month low of 1.44% last month.

Leading February’s defaulters by size, Windstream Holdings made a quick dash to Chapter 11 without a confirmed restructuring plan after a federal court ruled against the company in its long-running battle with Aurelius Capital Management over covenant default claims.

Despite the increase, the default rate remains well below the 3.1% historical average.

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Ditech, in restructuring agreement with loan lenders, files Ch. 11 but still seeks sale

Ditech Holding Corp. on Feb. 11 filed for Chapter 11 in bankruptcy court in Manhattan to implement a restructuring support agreement that the company has entered into with holders of more than 75% of the company’s term loan, the company announced.

According to a news release this morning, “the RSA provides for a restructuring of the company’s debt while the company continues to evaluate strategic alternatives.”

According to the first-day declaration filed in the case by Gerald Lombardo, the company’s CFO, the RSA contemplates that more than $800 million of funded debt would be extinguished, with the term lenders receiving 100% of the reorganized equity in exchange, and the existing term loan restated in the amount of $400 million.

The contemplated reorganization plan does not provide for any recovery for either the company’s second-lien lenders or current equity holders, although trade claim holders, deemed essential to the company’s ongoing operations, would receive a cash distribution “in an amount equaling a certain percentage of their claim, subject to an aggregate cap,” Lombardo said.

The RSA also contemplates “an appropriately sized working capital facility” upon emergence.

According to the Lombardo declaration, the RSA also provides for the possibility of “another liquidity enhancing transaction,” stating that as a “toggle” to such a transaction, the RSA “provides for the continuation of the company’s prepetition marketing process whereby any and all bids for the company or its assets will be evaluated as a precursor to confirmation of any Chapter 11 plan of reorganization.”

According to court filings, the company’s prepetition marketing process, which began in June 2018, generated at least one potential all-company bid that was subsequently withdrawn, and two bids for the sale of certain servicing and reverse assets with subservicing retained by the company. In December 2018, however, the company decided not to pursue a sale transaction, and turned its attention to negotiating a reorganization with term loan lenders.

Specifically, Lombardo explained, in connection with its reorganization plan, the company would seek proposals for three types of deals, namely a sale transaction for all or substantially all of the company’s assets, an asset sale transaction for a portion of the company’s assets, or a master servicing transaction consisting of an agreement with an approved subservicer to service all or substantially all of the company’s mortgage servicing rights.

“Accordingly, upon completion of the marketing process, not only will the reorganization transaction be fully market tested,” Lombardo said, “the debtors will also be in the best position to compare their options against the reorganization transaction before proceeding to confirmation of their Chapter 11 plan of reorganization.”

In terms of a timeline, the company said it would file a proposed reorganization plan and disclosure statement and proposed bidding procedures by Feb. 26, obtain orders approving the disclosure statement and bidding procedures by April 2, begin an auction (if needed) by May 17, begin a reorganization plan confirmation hearing by June 6, and emerge from Chapter 11 by June 16.

Finally, Lombardo said that to address the company’s immediate working capital needs that it has secured commitments for a $1.9 billion warehouse DIP facility to refinance the company’s existing warehouse and services advance facilities.

The commitments include up to $650 million to fund the company’s origination business, up to $1 billion available to the company’s reverse mortgage servicing business, and up to $250 million available to finance advance receivables related to the company’s servicing activities.

Weil, Gotshal & Manges is the company’s legal counsel, Houlihan Lokey its investment banking debt restructuring advisor, and AlixPartners its financial advisor.

Kirkland & Ellis is acting as legal counsel to the term lenders, with FTI Consulting acting as the group’s financial advisor.- Alan Zimmerman

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US Leveraged Loan Default Rate Slides to 17-Month Low

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The default rate on U.S. leveraged loans slid to 1.42% in January, marking a 17-month low for the asset class, according to LCD.

The rate is down from 1.63% in December and has fallen steadily from the three-year high of 2.42% at the end of 2018’s first quarter. It remains well below the 2.96% historical average.

The dip in the default rate comes despite sustained concern from the broader financial markets that the aging credit cycle, which began after the financial crisis of 2007-08, is approaching an end (though there is no consensus as to when that will be exactly, of course). One thing that all agree on: The widespread acceptance of covenant-lite loan issuance over the past few years – some 80% of leveraged loan debt now outstanding are cov-lite – has enabled or could allow loan issuers that might face problems with mounting debt to skirt potential default issues, for a time, anyway.

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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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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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Global High Yield Default Tally Dips to Lowest Level in 2 Years

The 2018 global corporate default tally remained at 76 this week, the lowest total for this point in December since 2015, according to a report by S&P Global Fixed Income Research.

The U.S. continues to hold the highest share of corporate defaults this year, with 44 (58% of the total), followed by emerging markets with 16, Europe with 11, and other developed markets (Australia, Canada, Japan, and New Zealand) with five.

By sector, oil and gas leads the default tally with 14 defaults, or 18% of the total, followed by retail and restaurants with 11, or 14% of the total.

Distressed exchanges continue to be the leading cause of defaults in 2018, with 27 defaults, followed by missed principal and interest payments (including defaults on debt obligations) with 24 defaults, bankruptcy with 16 defaults, and regulatory intervention with one default. The remaining eight defaults were confidential.

In terms of the trailing-12-month rate, the U.S. speculative-grade corporate default rate remained at an estimated 2.64% in November, while the European speculative-grade corporate default rate decreased to an estimated 1.93% in November, from 1.94% in October, according to S&P Global. — Rachelle Kakouris

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US Leveraged Loan Default Rate Dips to 1.61%

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Despite two fresh triggers from the embattled retail sector, the U.S. loan default rate fell to a 13-month low of 1.61% in November, according to the S&P/LSTA Leveraged Loan Index

The rate, down from 1.92% in October, has declined significantly after hitting a three-year high of 2.42% at the end of the first quarter.

By volume, the total of default debt outstanding slipped to $15.3 billion in November from $18 billion in October, as four issuers—Pacific DrillingExGen Texas PowerCumulus Media, and Walter Investment Management—rolled off the 12-month calculation.

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With David’s Bridal Filing, US Leveraged Loan Default Rate Rises stands at 1.61%

The default rate of the S&P/LSTA Leveraged Loan Index now stands at 1.61% by principal amount after David’s Bridal filed for Chapter 11 in bankruptcy court in Delaware.

With Pacific DrillingExGen Texas PowerCumulus Media, and Walter Investment Management all rolling off the 12-month calculation in November, the rate dipped to 1.44% at the beginning of this month, having closed out October at 1.92%.

david's bridalBy issuer count, the rate is now 1.56%, down from 1.79% at the end of October.

It its Disclosure Statement filed this morning, the company cited “challenging bridal retail market conditions,” including increasing competition at the lower price points from online retailers, and its substantial debt burden as reasons behind its decision to seek relief in bankruptcy court.

The filing, which was expected, came after the company announced that a restructuring support agreement had been reached with 85% of its term loan lenders and 97% of its senior noteholders, as well as its principal equity holders, on a deal to reduce the company’s debt by more than $400 million and hand ownership to senior lenders.

Pre-petition term loan lenders, which are expected to recover approximately 70.8%, would get 76.25% of the reorganized equity, while those who participate in the $60 million new-money DIP financing would get an additional 15% of the new equity, court filings show. Holders of its unsecured notes, which have an estimated recovery of 4.4%, would receive around 8.75% of the reorganized equity, in addition to warrants.

The issuer’s originally $520 million covenant-lite TLB was placed in October 2012 to back Clayton, Dubilier & Rice’s acquisition of the retailer from Leonard Green & Partners, which retained a minority stake in the business.

The company said it has sufficient liquidity to meet its business obligations, noting that it has obtained commitments for $60 million in new DIP financing from its current term loan lenders and a recommitment of its existing $125 million ABL revolving credit facility.

A confirmation hearing is set for Jan. 7 ahead of expected emergence from bankruptcy in early January. — Rachelle Kakouris

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Leveraged Loan Default Rate Dips Again After Third Straight Blemish-Free Month

leveraged loan defaults

For a third consecutive month there were no new defaults among constituents of the S&P/LSTA Leveraged Loan Index. Consequently, the default rate fell to a 10-month low of 1.81% in September, from 1.99% in August.

Though the rate has declined significantly from the three-year high of 2.42% at the end of March, it remains well inside the 3% historical average where, as detailed below in LCD’s quarterly default survey of loan portfolio managers, it is expected to stay for a couple more years.

By issuer count, the default rate fell to 1.59%, down from 1.71% at the end of August.

This marks the first three-month default-free streak in the Index since August 2014, though some potential situations loom.

The well-flagged 30-day grace period on American Tire’s missed Sept. 1 interest payment, for one, is set to expire at the end of September. Tweddle Group, meanwhile, is said to be negotiating a deal to equitize its term loans.

Other Index issuers whose debt is trading in technical distress include American Commercial LinesCaelus EnergyCatalina MarketingEmpire Generating Co.Longview PowerDavid’s BridalFullBeauty BrandsCrossMarkPetcoPhillips Pet Food & SuppliesCTI FoodsDixie ElectricAcademy LtdAcosta, and Revlon, among others. – Staff reports

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US Leveraged Loan Default Rate Holds at Low 1.97%

After a blemish-free July, the default rate for U.S. leveraged loans continues stubbornly low, holding at 1.97%, according to LCD.

The rate has been inside the historical norm of 3.1% since early in 2015, when the behemoth TXU/Energy Future default, which entailed more than $20 billion of outstanding loan debt, was part of the calculation (that issue dropped off the 12-month roll in April 2015).

U.S. leveraged loan defaults have remained scarce as the current issuer-friendly credit cycle heads into its tenth year.

One reason for the lack of defaults: corporate earnings continue robust, enabling borrowers to service debt they incur (unless they refinance it, of course).

Speaking of refinancing: Easy access to leveraged loans is another reason defaults have been rare.

With interest rates rising, institutional and retail investors have been throwing cash into this floating-rate asset class, allowing issuers to quickly refinance existing debt or – more alarming to some – structure the credits with few restrictions. In theory, these covenant-lite loans could allow borrowers to gloss over poor financial performance, with little warning for investors, until the company defaults. – Staff reports

This story was abstracted from analysis by LCD’s Rachelle Kakouris

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