YouTube video: April 2014 European leveraged loan market analysis

LCD’s video analysis detailing the European leveraged loan market during March and 2014′s first quarter is now on YouTube.

Of note is the imbalance created by thin supply and vigorous demand, which is causing conditions in the market to become increasingly issuer-friendly. The loan market definitely felt livelier in terms of new issuance, with a mix of new buyouts and opportunistic refinancing and repricing activity coming over the horizon. The elephant in the waiting room is Numericable, which has lined up a huge covenant-lite M&A financing to back its bid for SFR.

This month LCD looks at:

  • Annual senior loan volume
  • Annual arbitrage CLO volume
  • Average TLB primary spread and yield to maturity
  • Annual pro forma debt/EBITDA ratios of LBOs
  • Quarterly Index returns (excluding currency)
  • Forward pipeline volume as of April 4, 2014

The video is available here.

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

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CLO Pipeline: Supply Continues Apace Despite Volcker Disappointment

The primary CLO market stayed busy last week, with LCD tracking seven new CLOs pricing in the U.S., for a total of roughly $3.56 billion, a touch inside last week’s $3.57 billion, which was the largest weekly new-issue tally of the year. Things were quieter in Europe, with Alcentra expected to be the next manager to print a European CLO several weeks down the line (see below). Global issuance for the week stood at $3.56 billion, according to LCD.

Part of this past week’s supply likely results from arrangers and managers wanting to clear the near-term decks ahead of the pending Easter break, as well as the IMN’s Third Annual Investors’ Conference on CLOs and Leveraged Loans, taking place in New York on April 22-23. As a result, new CLO pricing activity could take a breather over the next couple of weeks.

Still, with this past week’s impressive tally, YTD issuance through April 11 has now overtaken last year’s supply over the same period, at $29.77 billion versus $26.92 billion, according to LCD. It’s the first time in 2014 that issuance has run ahead of last year, following a quieter-than-usual January.

Again supply came from a mix of established platforms, as well as another brand new manager – Bradford & Marzec. Of note, Prudential’s jumbo $811.75 million CLO – the second largest cash-flow CLO transaction of the year behind CIFC’s $829 million CIFC Funding 2014-II – priced its AAAs inside 150 bps, at 148 bps (DM).

Halcyon Loan Advisors Funding 2014-2 is expected to price today via Citi, after all tranches except the BBs were subject by Friday. The same arranger is also looking to price a refinancing of Octagon Investment Partners XII for Octagon Credit Investors this week.

Meanwhile, Deutsche Bank is working on a $512.58 million CLO for Benefit Street Partners, while Steele Creek (via BNP), Aegon USA Investment Management (Jefferies), and Saratoga Investment Corp. (via Cohen & Co) are among those in the pipeline.

Across the pond
Europe’s next transaction may not appear until after the Easter break, with Alcentra likely to be the next out of the door in the next couple of weeks. Oaktree is rumoured to be three-to-four weeks away with its debut European CLO 2.0 (via Barclays), and behind that are Pramerica (via Barclays), 3i (via CS), Carlyle (via Citi), and Avoca (via Morgan Stanley).

YTD European CLO issuance stands at €3.02 billion, versus €600.5 million in the year-ago period, according to LCD.

Alcentra is working with J.P. Morgan on its second CLO 2.0 of the year, having priced an upsized €413.5 million CLO – Jubilee CLO 2014-XI – in January.

Both CLOs are structured via Rule 3a-7, which allows the Bank of New York-owned manager to retain bonds in the collateral pool while still exempting the vehicle from the final draft of the Volcker Rule.

Volcker moved back into focus this week after the Fed’s decision to grant banking entities two one-year extensions to the conformance period under the Volcker Rule, to July 21, 2017. The move minimizes the impact of the rule for 1.0 CLOs, as the vast majority of the current $135 billion CLO 1.0 universe is expected to have amortized or been repaid by then. However banks holding CLO 2.0 deals will still need to comply with the rule, which doesn’t permit them to own positions in CLOs that hold bonds.

In response, the LSTA said the two-year extension “does not solve the problem”. Market participants had been hoping for a more permanent fix, akin to that proposed by the legislation drafted by Rep. Barr, which would grandfather all CLO debt issued before Jan. 31, 2014. There’s speculation among some market participants that regulators won’t take any other actions regarding the Volcker Rule. As for the legislative route, sources say it would be difficult to get bipartisan support for the Barr Bill beyond the committee level, as Democrats have little or no desire to circumvent the regulators.

If the vast majority of the current $135 billion CLO 1.0 universe is expected to have amortized or been repaid by July 2017, the bulk of CLO 2.0s issued after 2009 (roughly $140 billion, according to Wells Fargo’s David Preston) could still be outstanding after July 2017.

Included among the possible solutions for this batch of CLOs with regards to Volcker compliance/exemption are refinancing, amendments to exclude bonds, bond removal from portfolios, inclusion of existing manager removal clauses (“for cause” removals and “key manager” clauses) as events of default, and as a last fix, waiving manager removal rights.

For European managers structuring deals as loan-only is a non-starter for most given the reliance of European CLOs on the bond market to boost collateral pools, so any that do need to structure Volcker-compliant deals will have to utilise 3a-7, or eliminate the ‘removal for cause’ clause for the controlling class, which would exempt the CLOs from Volcker.

But Europe generally has been more relaxed about structuring Volcker compliant/exempt deals, as aside from JPM CIO, U.S. banks do not tend to invest in European CLOs, and European investors appear less focused on liquidity, sources say. – Sarah Husband


US CLO Market Sees Busiest Week Of Year

Issuers got right down to business as the second quarter got underway, with no fewer than five CLOs pricing in the U.S., along with one in Europe. In the U.S., week ending April 4th’s $2.75 billion supply total was the highest of the year, just topping the $2.7 billion issued in the week ended March 14, according to LCD. Week ending April 4th’s surge comes after March saw $11.15 billion of issuance, the highest monthly tally since May 2007, when $10.82 billion priced. Global supply for the week stood at $3.26 billion, including $514 million from European issuers, according to LCD.

Global supply for the week stood at $3.26 billion, including $514 million from European issuers, according to LCD.

Included among the offerings stateside last week were three broadly syndicated CLOs from established managers and two middle-market CLOs, as well as two refinancings (LCD does not count refinancings in its volume figures).

New CLO supply in the U.S. in the year to date stands at $25.38 billion, versus $26.61 billion during the same period last year, according to LCD.

In addition, CIFC Asset Management priced a $724.49 million CLO (CIFC Funding 2014-II) via RBS last Friday, which LCD has not yet included in its volume figures.

GSO/Blackstone was busy on both sides of the Atlantic, pricing Pinnacle Park in the U.S. and Holland Park in Europe. The former secured a tight print of L+150 on its AAA tranche, while the latter was the largest CLO to price in Europe this year.

The average U.S. AAA spread remains at 155 bps, so Pinnacle Park’s print was eye-catching. Expectations are that liability spreads will contract a little over the coming quarter, with a recent investor survey by J.P. Morgan indicating AAA spread expectations of L+135-155 and Wells Fargo’s David Preston predicting a tightening to L+140-145. Still, ongoing heavy supply will prevent too much tightening.

Any narrowing of liability spreads, along with softer secondary loan prices as retail investors’ enthusiasm for loans eases, would create a less challenging backdrop for CLO managers trying to ramp deals. But it would likely ensure that issuance remains heavy over the coming months. The pipeline certainly remains healthy, sources say, with more first-time managers looking to price deals over the next quarter.

Managers looking to price deals in the near term include:

  • GC Investment Management (Golub Capital Partners CLO 19B), via Citi (this week)
  • Bradford & Marzec (B&M CLO 2014-10, via Credit Suisse (this week)
  • Halcyon Loan Advisors (Halcyon Loan Advisors Funding 2014-2), via Citi (next week)
  • Telos Asset Management (Telos 2014-5 CLO) via BNP Paribas

Also in the pipeline are Steele Creek (via BNP), Aegon USA Investment Management (Jefferies), Saratoga Investment Corp. (via Cohen & Co).

Refinancings have been a big theme this year, and last week saw another two managers reduce their cost of funding, bringing the total number of CLO refis this year to six, according to LCD.

BNP Paribas priced a refinancing of all debt tranches of LCM Asset Management’s 2012-vintage LCM X transaction, reducing the coupon on the $259 million triple-A tranche to L+126, from L+148. And Citi priced a refinancing of all of the debt tranches of Invesco’s 2012-vintage Avalon IV CLO. The transaction reduces the coupon on the $231 million triple-A tranche to L+117, from L+150. The refinancing priced at par.

Across the pond
European issuance continued last week with GSO Blackstone’s Holland Park, via BNP Paribas. This transaction is GSO’s fourth European CLO 2.0, and it follows the €615.7 million Richmond Park, which priced via Citi in December.

Holland Park marks BNP’s return to the European CLO market, and it follows Goldman Sachs’ return last week, when it priced CVC Cordatus Loan Fund III for CVC Credit Partners. The addition of two more arrangers should be encouraging to those managers concerned about the relatively thin arranger base, which some blame for the slow feed of new deals to market.

But while the arranger base might be thin, investors in the European CLO market are also keen to see a more diverse manager pool. As a result, there was great interest in CVC Cordatus Loan Fund III CLO, which was structured via the originator method to comply with European risk-retention regulations. The originator structure is not new to the U.S. market, and it has been used by managers such as Canaras Capital Management, KKR, and Black Diamond, as well as by BDCs. But it is the first time a European manager has ventured from the more accepted sponsor route, and there are hopes that it could potentially open up the market to a broader number of European managers.

Notably, Saranac Advisory (Canaras Capital Management) just closed Saranac CLO II via Jefferies, which is another U.S. CLO to use the originator structure.

Including GSO’s deal, issuance in the year to date in Europe stands at €3.02 billion from seven deals, according to LCD.

Looking ahead, however, it could be a few weeks before the next pricing, sources say. Alcentra (via J.P. Morgan) could well be the next manager to print in Europe, making it the first to price two deals this year, sources say. Others targeting second-quarter deals are CELF Advisors (via Citi), 3i Debt Management (via CS), Avoca (via MS), and Oaktree (via Barclays).

– Sarah Husband


Ruitenberg appointed head of Leveraged Finance Germany at NIBC


Victor Ruitenberg has been appointed as head of Leveraged Finance Germany at NIBC Bank, according to market sources. He will report into Jean Spanjersberg, global head of leveraged finance.

Ruitenberg has been with the bank since 2001, and was responsible for starting its Frankfurt branch in 2005. More recently, he has been responsible for NIBC’s entire leveraged finance portfolio. – Sarah Husband