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CLO roundup: U.S. supply beats forecasts, Europe nears upper limit

CLO activity in the U.S. was curtailed by the Thanksgiving holiday, with just three U.S. CLOs pricing last week.

Europe managed two transactions, but the primary pipeline is hampered by waning investor appetite and widening liability spreads.

As a result, global issuance has risen to $132.87 billion, according to LCD.

Ahead of the Thanksgiving break, arrangers were focused on getting those deals priced that they could, and lining up further transactions for this week once the market returns. New-issue activity will be on hold again early next week as players head to Dana Point, Calif. for Opal’s CLO Summit this weekend.

LCD subscribers can click here for full story, analysis, and the following charts:

  • Deal pipeline
  • US arbitrage CLO issuance and institutional loan volume
  • European arbitrage CLO issuance and institutional loan volume

– Sarah Husband

Follow Sarah on Twitter for the latest CLO market news and insight.

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Fed: Problems with leveraged loans remain, despite recent guidelines

A joint report by the Federal Reserve, FDIC, and Office of Comptroller of the Currency shows that little has changed among lending practices since the March 2013 leveraged lending guidance was released. The report found that the volume of loans that are rated with negative implications by rating agencies – referred by the agencies as a criticized asset – remained unchanged in 2014 from the prior year, at roughly $341 billion, or 10% of total loan commitments.

Leverage loans, as reported by agent banks, make up roughly 23%, or $767 billion, of the annual Shared National Credits (SNC) review – a review that was established in 1977 to review any formal loan, commitment, and asset such as stock, notes, and bonds extended to borrowers by a federally supervised institution and includes commitments that FBOs and nonbanks such as securitization pools, hedge funds, and insurance companies participate in. In the SNC review, leverage loans accounted for roughly $255 billion, or 75% of “criticized” SNC assets. The report also notes that roughly a third of leverage loans were criticized.

A full report of the shared national credits program 2014 review and the leverage loan supplement are attached, downloadable here:  Shared National Credits Program 2014 Review  &  Leveraged Loan Supplement.

The report also included a leveraged loan supplement that identifies several areas where institutions need to strengthen compliance the March 2013 guidance, including provisions addressing borrower repayment capacity, leverage, underwriting, and enterprise valuation [attach PDF]. In addition, examiners noted risk-management weaknesses at several institutions engaged in leveraged lending including lack of adequate support for enterprise valuations and reliance on dated valuations, weaknesses in credit analysis, and overreliance on sponsor’s projections.

The LSTA released a statement this afternoon stating that leverage lending is a critical for the U.S. economy and encouraged agencies to continue evaluating leveraged loans on a “nuanced basis, balancing the importance of a safe system, while ensuring that credit-worthy companies are still able to access the financing they need. – Richard Kellerhals

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Red October: Second-liens suffer in rough month for leveraged loan market

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It’s no great surprise, but second-lien prices have fallen further than first-lien prices during the loan market’s October setback. Indeed, the average bid of first-lien paper in the S&P/LSTA Leveraged Loan Index has dropped 0.34 points, to 97.87 on Oct. 24, from 98.21 on Sept. 30. Over the same period, the average second-lien bid has slumped 1.42 points, to 97.86, from 99.28.

LCD subscribers can click here for full story, analysis, and the following charts from this article:

  • Monthly returns
  • Average Spread to maturity for leveraged loans
  • Averaged new-issue yield to maturity
  • Second-lien volume

– Steve Miller

Follow Steve on Twitter for an early look at LCD analysis, plus market commentary.

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Leveraged loan funds see largest outflow since Aug. 2011, led by mutual funds

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Cash outflows from bank loan funds swelled to $1.66 billion during the week ended Oct. 22, up from a $946 million outflow in the previous week, according to Lipper. The reading reflects mutual fund outflows of $1.56 billion, plus a $98 million outflow from the exchange-traded fund segment, and it represents the largest outflow since the $2.12 billion recorded for the week ended Aug. 17, 2011.

The latest reading represents the 26th outflow in the past 28 weeks, for a net redemption of $16.8 billion over that span.

The trailing four-week average deepens to negative $1.22 billion from negative $897 million last week and negative $807 million two weeks ago. The four-week average surpasses the previous high reading of negative $944 million for the four weeks ended Aug. 24, 2011.

The year-to-date fund-flow reading pushes deeper into negative territory, at roughly $9.68 billion, based on a net withdrawal of $9.71 billion from mutual funds against a net inflow of $32 million to ETFs. In the comparable year-ago period, inflows totaled $46.65 billion, with 11% tied to ETFs.

The change due to market conditions was positive $322 million, versus total assets of $96.9 billion at the end of the observation period. The ETF segment comprises $7.4 billion of the total, or approximately 8%. – Joy Ferguson

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Leveraged loan fund outflows reach nearly $1B, led by mutual funds, 14th straight week of outflows

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Cash outflows from bank loan funds increased to $946 million during the week ended Oct. 15, according to Lipper. The reading reflects mutual fund outflows of $869 million plus a $76 million outflow from the exchange-traded fund segment.

The latest reading is an uptick from an outflow of $825 million last week and it represents the 25th outflow in the past 27 weeks, for a net redemption of $15 billion over that span.

The trailing four-week average deepens to negative $897 million per week, from negative $807 million last week and negative $686 million two weeks ago. This is the largest average since a negative $944 million reading for the four weeks ended Aug. 24, 2011.

The year-to-date fund-flow reading pushes deeper into negative territory, at roughly $8 billion, based on a net withdrawal of $8.2 billion from mutual funds against a net inflow of $131 million to ETFs. In the comparable year-ago period, inflows totaled $45.9 billion, with 11% tied to ETFs.

The change due to market conditions was negative $829 million, versus total assets of $98.3 billion at the end of the observation period. The ETF segment comprises $7.4 billion of the total, or approximately 8%. – Joy Ferguson

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CLO roundup: U.S. nears volume record as Europe AAAs see new low

The CLO market returned to form last week as eight managers printed deals in the U.S. and Europe, for a total of $3.88 billion, according to LCD. Of this, the U.S. priced six for $2.8 billion, while Europe priced two for just over $1 billion. Global volume stands at $110.56 billion in the year to date, according to LCD.

Year-to-date issuance in the U.S. is $95.87 billion from 177 deals, nearing the all-time high of $97.01 billion in 2006. Given the near-term pipeline, which holds at least six CLOs for roughly $3 billion, it’s highly likely the record will be broken this week. In the same period last year, issuance stood at $60 billion from 124 deals.

LCD subscribers can click here for full story, analysis, and the following charts:

  • Recent deals
  • European arbitrage CLO issuance and institutional loan volume
  • Deal pipeline
  • Global CLO volume


. - Sarah Husband

Follow Sarah on Twitter for the latest CLO market news and insight.

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Leveraged loan fund outflows grow to $1.44B, 4x increase, led by mutual funds

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Cash outflows from bank loan funds increased nearly fourfold, to $1.44 billion during the week ended Oct. 1, versus $382 million last week, according to Lipper. The recording is the largest outflow since the week ended Aug. 6, when $1.5 billion left loan funds.

The influence of bank-loan ETFs on this week’s number was 18%, or $262 million, versus an outflow of $48 million from ETFs last week.

There now have been 23 weeks of outflows over the past 25 weeks, for a total outflow of $13.3 billion over that span, which follows a record-shattering 95-week inflow streak that totaled $66.7 billion.

With this week’s large outflow, the trailing four-week average gaps out to a negative $686 million per week, from negative $435 million last week. This measure remains below the recent peak of negative $858 million from the week ended June 11.

The year-to-date fund-flow reading pushes deeper into negative territory, at $6.3 billion, based on a net withdrawal of $6.4 billion from mutual funds against a net inflow of $133 million to ETFs. In the comparable year-ago period, inflows totaled $45 billion, with 11% tied to ETFs.

The change due to market conditions was negative $126 million, versus total assets of $100.8 billion at the end of the observation period. The ETF segment comprises $7.5 billion of the total, or approximately 7%. – Joy Ferguson

 

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CLO roundup: Europe supply passes FY forecast, US pipeline builds

Europe saw the bulk of the action this week, pricing three new CLO transactions, against two for the U.S. market. The ABS East conference, taking place at the start of the week, dampened new-issue activity stateside, leaving the European CLO market to step into the spotlight on two counts: supply and spreads.

LCD subscribers can click here for full story, analysis, and the following charts:

  • Deal pipeline
  • US arbitrage CLO issuance and institutional loan volume
  • Global CLO volume

. - Sarah Husband

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Leveraged Loans: CLOs drive investor mart as retail remains in red

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In the third quarter, the investor base for new-issue leveraged loans grew even more dependent on CLO funding amid (1) retail outflows from loan funds and (2) ongoing reticence by banks and securities firms to play in loans in which they don’t have an arranger role.

Banks, in fact, were again bit players during the first three quarters of 2014, taking a record-low 9.9% of non-arranger allocations to leveraged loans, according to LCD’s analysis, down from 14.1% in 2013. Banks’ share in the third quarter was in line, at 9.8%.

LCD subscribers, please click here for full story, analysis, and the following charts:

  • Share of institutional volume rate four-B or higher
  • Number of loan investor groups
  • Visible inflows to the loan asset class
  • Primary market for institutional loans
  • Average AAA CLO spread
  • Share of S&P/LSTA Index bid below par and single-B YTM
  • Repricing volume
  • Primary market for institutional loans
  • Relative-value players’ share of allocations and high-octane volume
  • Primary allocations of 2014 institutional loans by investor type
  • Number of managers that issued a 2.0 CLO
  • Average CLO size
  • CLO and Index outstandings
  • CLO outstandings as a share of S&P/LSTA Index
  • CLO outstandings
  • Assets under management 2Q 2014


– Steve Miller

Follow Steve on Twitter for an early look at LCD analysis, plus market commentary.

 

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Leveraged loan default rate to remain low in months ahead: LCD survey

Managers expect loan defaults to remain scarce in the near future, according to LCD’s latest quarterly buyside survey, taken in early September.

On average, managers predicted that the lagging-12-month default rate of the S&P/LSTA Leveraged Loan Index will end 2014 at 0.78% by amount, versus 0.44% in August. (These figures exclude Energy Future Holdings. Including EFH, they are 3.88% and 3.34%, respectively.) Looking out to September 2015, managers expect the rate to climb to 1.38% (EFH will have fallen from the lagging 12-month rolls by then).

For LCD subscribers, please click here to access the complete story, analysis, and the following charts:

  • Earnings growth of S&P companies
  • Averaged cash-flow coverage of outstanding loans
  • Averaged leverage of large LBOs
  • Average (EBITDA-capex)/cash interest of large LBOs

– Steve Miller

Follow Steve on Twitter for an early look at LCD analysis, plus market commentary.