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European CLO Issuance Continues on Record Pace

Europe CLO issuance

Issuance of collateralized loan obligation vehicles in Europe so far this year, at €20.41 billion, has nearly topped the €20.91 billion seen during all of 2017, according to LCD.

While activity in the segment is expected to roll on, a pair of huge cross-border LBOs to clear market recently – Refinitiv and Akzo Nobel – did cause some consternation for CLO players, as those deals priced at a tighter level than expected, market sources said.

Refinitiv’s $2.75 billion-equivalent euro-denominated term loan priced at E+400, after being initially launched to market at E+425, while a €1.79 billion credit for Akzo eventually priced at E+375 after being first talked at E+425. Pricing on both was cut due to investor demand.

Refinitiv backed Blackstone’s $17 billion acquisition of a Thomson Reuters Financial & Risk unit stake. Akzo backed Carlyle and GIC’s buyout of the company.

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With Help from Refinitiv, LBO Leveraged Loan Issuance tops 2017 Levels

lbo loan issuance

Big-ticket LBOs are driving the U.S. leveraged loan market in 2018.

So far this year $90 billion of credits backing buyouts have been launched or completed in the syndicated loan market, nearly as much as in all of 2017, according to LCD.

The 2018 LBO loan figure has received a huge boost of late via a spate of jumbo transactions. Chief among them is Refinitiv, which includes $6.5 billion of institutional loan debt backing Blackstone’s $17 billion takeover of Thomson Reuter’s financial data and technology unit (the PE firm is acquiring a 55% stake). The loan portion of the deal was targeted for $5.5 billion, but was increased due to investor demand.

Tellingly, the high yield bond portion of the Refinitiv financing was decreased at the same time, illustrating the clear preference that speculative-grade debt investors have for loans this year, compared to bonds

As is often the case, LBO loans and other M&A deals are in keen demand from institutional investors as these credits generally offer higher pricing and richer returns than do non-M&A credits, because of their increased leverage and often-aggressive terms.

Of course, with the chance for higher returns comes more risk. This is especially the case today, as most credits completed in market now are covenant-lite, meaning they are less restrictive for the issuer, and consequently offer investors and lenders less protection during the life of the loan.

Indeed, of the $90 billion in LBO loans so far this year, $78 billion is cov-lite. This tracks with the overall U.S. leveraged loan asset class, which now totals some $1.1 trillion, according to the S&P/LSTA Index. Roughly 80% of those outstandings are cov-lite. – Staff reports

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Middle Market: Private Debt Funds Account for Half of European Leveraged Loans

In the U.K., private debt funds racked up a market share of almost 50% of mid-market term loans (those under €300 million in size) in the first half of 2018, according to advisory firm AlixPartners’ bi-annual mid-market debt report. When stretch senior deals were combined with unitranche loans, private debt funds provided 46% of loans in the U.K., the report reveals.

Sources credited the continued increase in debt funds’ market share to the maturity of the U.K. market, as well as the density and openness of sponsors operating there to non-bank lenders.

The total deal count for European debt funds in the first six months of 2018 hit 181, led by Ares (21 deals) and Tikehau (16 deals). That figure was down on the 203 deals racked up in the second half of 2017. On an overall European basis, unitranche deals increased their market share to 31% of all deals recorded, up from 27% in 2017, said the report. That proportion rises to 35% when super-senior and junior facilities are excluded.

Unlike the large-cap syndicated market, which has been dominated by M&A this year, the drivers for mid-market deals have remained extremely stable, according to AlixPartners. The proportion of leveraged buyouts (45%) and refinancings (24%) were the same in 1H18 as they were for full-year 2017. Add-on acquisitions increased marginally from 22% in 2017 to 25%, while dividend recaps fell to 6% in the first half of the year, from 8% in 2017. — Rachel McGovern

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Leveraged Loans: As New Issues Roll on, CLO Spreads in Europe, US Creep Higher

Europe CLO spreadsWith such a strong pipeline for collateralized loan obligations in Europe – managers expect full-year 2018 issuance to best the record €20.91 billion last year – the market could experience further indigestion, which was already witnessed pre-summer. Due to that overcrowding, CLO spreads have widened to as much as 96 bps on the AAA portion of the deals, for the last print and to an average of 92 bps in August, according to LCD.

Likewise, CLO spreads in the U.S. have risen amid issuance which also is expected to set records this year (there’s $92 billion of new vehicles so far this year, compared to $73 billion YTD 2017). Indeed, the last week of August has historically been a quiet one, allowing market participants a breather before activity picks up in the fall, but this year has been noticeably different, with a surprising 14 new issues and 10 resets/reissues pricing the last two weeks, according to LCD.

“It’s absolutely astounding how there has been no slowdown whatsoever this year,” one CLO manager said.

CLOs are special-purpose vehicles set up to hold and manage pools of leveraged loans. These vehicles are a critical investor component to the leveraged loan market, which totals some $1.1 trillion in U.S. alone, according to the S&P/LSTA Loan Index. – Isabell Witt/Andrew Park

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Amid M&A Frenzy, LBO Leveraged Loans Surge to Record Size

europe LBO loan

Propelled by the ongoing M&A binge and mountains of cash for private equity shops to spend, leveraged loans backing LBOs in Europe have shot to record size in 2018.

These credits, which traditionally have been arranged by large banks, then syndicated to institutional investors such as collateralized loan obligations vehicles (CLOs), pension funds, and other institutional investors, have grown to an average of €689 million so far this year, according to LCD. That’s a big leap from €447 million in 2017.

Why the increase?

These mega-buyout financings are being driven by a combination of factors, including readily available and cheap debt (despite a recent widening of spreads charged to borrowers), a record amount of dry powder raised by private equity firms, strong corporate earnings, and big assets coming up for sale — especially through divestments of non-core businesses from large corporates, as well as break-ups as a result of increased shareholder activism, PE firms say.

Private equity players add that large buyouts are particularly attractive in the current market, which has become tougher due to fiercer competition, including more sovereign wealth funds and pension funds coming in, and rising valuations. Indeed, on a rolling three-month basis, average purchase-price multiples reached 11.3x in March this year, according to LCD. That’s the most since the financial crisis (though it has dipped since March).

This story is abstracted from an LCD News story by Isabell Witt.

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Video: Global Leveraged Loan Issuance Surges Past 2017 Benchmarks

In the latest Capital Markets View video, LCD’s Taron Wade and S&P Global’s Chris Porter talk about the main trends in the European leveraged loan space during the second quarter, including a comparison with the U.S. market.

xborder loan issuance

Discussed this month:

  • Volumes are up globally. To end 2Q18, global loan issuance reached $446 (€381) billion, which is ahead of the same period in 2017.
  • M&A is still the fuel. In the U.S., M&A was responsible for 58% of all institutional issuance in 2Q, with a record $84.2 (€71.9) billion. In Europe meanwhile, M&A drove more than 80% of loan activity in 2Q, generating €22.6 ($26.5) of supply.
  • This activity is not all sponsor-driven. Corporate M&A has been a big component, with large cross-border deals coming from Cineworld and Stars Group.
  • The volume of cross-border deals in the U.S. and European leveraged finance markets is well ahead of where it was this time last year, driven both by larger deals and widely diverging funding rates between the two regions.
  • Although headline leverage is not too elevated currently, market players say they continue to see aggressive EBITDA add-backs in deals.
  • Institutional investors’ share of the market in Europe still lags behind that of the U.S.
  • The ratio of investor-friendly price flexes to issuer-friendly flexes in the U.S. and Europe has risen in recent months.

The URL for the video:https://www.spratings.com/en_US/video/-/render/video-detail/capital-markets-view-july-2018

Taron Wade heads up LCD’s European Research efforts. Chris Porter is Head of Loan Recovery & CLO Business Development, S&P Global.

As ever, please feel free to contact Taron or Chris if you’d like a particular topic discussed in the next video.
Note: Capital Markets View will be on hiatus during August, and will return in September.

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European Leveraged Loans: Ares Prices €463M CLO; YTD Issuance: €16.7B

Bank of America Merrill Lynch has priced an upsized €463.15 million Ares European CLO X for Ares European Loan Management.

The deal was upsized from €412.05 million, with the triple-As seeing the largest increase. All tranches came in line with guidance except the double-As, which came a touch wider.

Details are as follows:

Aries CLO 2018-07-26

The deal will settle on Sept. 6, and matures Oct. 15, 2031. The non-call period ends Oct. 15, 2020, and the reinvestment period ends on April, 15, 2023. The WAL test is 8.5 years.

The deal complies with European risk retention, with the manager taking a horizontal strip.

Ares priced its last CLO — the €413.7 million Ares European CLO IX — via Goldman Sachs in February, with the triple-As paying plus 68 bps on the floating-rate tranche.

This transaction takes the July new-issue numbers to eight deals for €3.3 billion, which is the largest monthly deal count and volume this year.

The year-to-date European CLO deal count and volume is now 40 for €16.7 billion, versus 26 for €10.45 billion in the same period last year. — Luke Millar

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Free Webinar: 2Q18 Global High Yield Outlook (with Marty Fridson)

LCD/S&P Global Market Intelligence’s webinar detailing the second-quarter 2018 high yield markets, and a look ahead to the second half of the year, is now available to view free, on-demand.

This presentation features analysis from Marty Fridson of LCD and Lehmann Livian Fridson Advisors, along with John Atkins, Luke Millar, and Ruth Yang of LCD.

You can view the webinar here.

hy default recessions

In this quarter’s presentation:

  • Today’s dire high-yield headlines, vs. market realities
  • U.S. high-yield issuance sinks …
  • … though M&A/LBO share of market rises
  • HY prices in the secondary soften noticeably
  • European high-yield issuance sinks, as well …
  • … with a host of offerings pulled from market
  • High-yield spreads rise in the U.S. and Europe

hy prices

LCD presents these high-yield market updates each quarter.

The charts used in the presentation are available for download.

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Fixed-Income: Reverse-Yankee High Yield Bond Issuance Soars

reverse yankee

Speculative-grade debt issuers from the U.S. tapped the European high yield bond market at a record pace in 2018’s first half, taking advantage of decidedly cheaper financing costs in that market.

During the first six months of the year there was €8.2 billion of this ‘reverse-Yankee’ activity, an increase from €5.6 billion in 2017’s second half, and well up from levels seen in 2010 through 2014, according to LCD.

Why the surge in reverse-Yankee activity?

single b yields

Simply put, the European high-yield market, via euro-denominated deals, is a less-expensive financing option for U.S. issuers. For lower-rated companies, for instance – issuers rated single B – Europe has during the first half of the year offered financing that averages 156 bps cheaper than in the U.S., according to LCD. That’s up from a 125 bps difference in 2017’s first half.

This analysis was excerpted from a story on LCD News by Luke Millar.

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Leverage Loan Returns Sink in Europe as Investors Shift Focus Within Segment

europe leveraged loans

In June, the European secondary loan market experienced its worst returns in two years. However, unlike in June 2016 — when the market was reacting to a geopolitical event, namely the U.K.’s Brexit vote — this year the trigger was market-driven, with secondary prices tumbling as loan investors rotated out of lower-priced names to take advantage of higher yields amid a rapidly repricing primary market.

As a result of steep secondary price declines, the S&P European Leveraged Loan Index (ELLI) lost 0.43% last month — the first time this measure has been in the red this year, and the worst performance since the 0.60% loss recorded in June 2016. The first five months of 2018 delivered positive (albeit unspectacular returns), averaging 0.27% per month (excluding currency fluctuations). For the year through June 30 the ELLI was up 0.90%, a far cry from the 2.65% gain racked up in the first half of 2017. – Marina Lukatsky

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