YouTube: 4Q 2015 European leveraged loan market analysis

LCD’s video analysis detailing 2015 fourth-quarter activity in the European leveraged loan market, and a look at 2016, is now on YouTube.

The 2015 market could not match 2014 in terms of volume, but it did post impressive returns – at least compared to its counterpart in the U.S. LCD’s Ruth McGavin takes a look at the market, and what might lie ahead this year. Charts in the video:

– European leveraged loan volume 

– Leveraged loan repayments vs CLO issuance 

– Secondary loan bids, Europe vs US

– Returns by assets class: loans, bonds, equities

– Leveraged loan yields, US vs Europe

– Loan forward calendar

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High Yield Bond Issuers Remain On Sidelines; Better-Rated Leveraged Loans Eye Market

The U.S. leveraged finance market continues to plod along, with a slim $4.5 billion in leveraged loan issuance this week and one lone deal totaling $400 million in the troubled high yield bond space, according to S&P Capital IQ LCD.

leveraged finance issuance

In the loan market, issuers and arrangers are making an effort to kick-start 2016 though they are battling supply/demand fundamentals and watching high-profile deals already in syndication for an idea of which way the market winds are blowing.

“Several new loan issues crossed the tape this week, but evidence of a bifurcated market remains,” says LCD’s Chris Donnelly, in his weekly market wrap-up.

Indeed, issuers of the single-B rated, $2.5 billion loan backing the LBO of Petco Animal Supplies by CVC Capital and Canada Pension Plan had to sweeten the interest rate and make other investor-friendly changes to complete syndication, Donnelly says.

Higher-rated credits seem to be having an easier time. Fiber-optics concern Zayo Group during syndication decreased the interest rate on a $400 million credit which backs an M&A deal. The Zayo loan is rated BB-/B2.

Year to date, U.S. leveraged loan issuance totals $10.5 billion, compared to $13.3 billion at this point last year.

These syndications maneuverings come as investors continue to retreat from the loan space. U.S. loan funds last week saw their 25th straight outflow, as investors withdrew $461 million, according to Lipper.

The high yield bond market continues to struggle. Pinnacle Foods was the sole issuer last week, with a $400 million deal backing an acquisition of Boulder Brands.

The global economic turmoil is roiling this often volatile market.

“It was too choppy for even high-quality names [to issue], despite the U.S. Treasury Market strength, which sent yields to three-month lows,” says LCD’s Matt Fuller.

As with the loan market, it’s risk-off for high yield. U.S. high yield funds and ETFs saw a whopping $2.1 billion withdrawal last week, thanks largely to the ETF sector, which comprised nearly 75% of that amount, says Lipper.

Year to date, U.S. high yield issuance totals $1.2 billion, compared to $8.6 billion in 2015. – Tim Cross

Check out, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here


Leveraged Loan Issuers Take Pause as High Yield Woes Worry Markets

Issuance in the U.S. leveraged finance market all but shut down last week as junk bond players watched a highly visible fund liquidate and leveraged loan players remained largely on the sidelines, with one eye on year-end and the other on the careening high yield market.

leveraged finance volume

Third Avenue Management last week barred redemptions from a $788 million junk bond fund – opting instead to liquidate – spooking many in market who had been watching high yield ETFs sputter along for much of the year. (If you were unfortunate enough to be on or near Twitter on Friday you might have been convinced a financial apocalypse is nigh, with the iShares iBoxx high yield ETF fund the lead horseman).

“Activity ramped down more quickly than anticipated for new issues [last] week as the secondary market fell hard alongside plunging oil, gas, and iron ore prices,” explains Matthew Fuller, who covers high yield for S&P Capital IQ’s LCD unit.

The high yield worries come alongside a hefty investor retreat from funds. Last week saw a withdrawal of $3.5 billion from high yield mutual funds and ETFs, the largest such sum in 70 weeks, according to Lipper. Year to date, high yield funds have seen a net outflow of $2.1 billion, says Fuller, quoting Lipper.

YTD high yield issuance in the U.S. is $263 billion, a 15% drop from the $310 billion at this point in 2014, according to LCD.

The U.S. leveraged loan market was largely quiet last week, with a handful of smallish new issues. Year-to-date U.S. issuance stands at $424 billion, down almost 20% from the $526 billion at this point last year. Tim Cross

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Third Ave’s liquidating debt fund holds concentrated, inactive paper

The leveraged finance marketplace is abuzz this morning ahead of a conference call to address to a plan of liquidation for the Third Avenue Focused Credit mutual fund following big losses this year, mild losses last year, heavy redemptions, and now a freeze on withdrawals. The news was publicly announced last night by the fund, and there will be a call at 11 a.m. EST for shareholders with lead portfolio manager Thomas Lapointe, according to the company.

Market sources yesterday relayed rumors of a near-$2 billion redemption from the asset class, and as one sources put forth, “the odd thing was it was difficult to trace the money that left, what was sold, and where it went.”

That was followed up by last night’s whopping, $3.5 billion retail cash withdrawal from mutual funds (72%) and ETFs (18%) in the week ended Dec. 9, according to Lipper, although it’s not entirely clear if that figure—the largest one-week redemption in 70 weeks—can be linked to Third Avenue. (LCD subscribes to weekly fund flow data from Lipper, but cannot see inside the aggregate observation.)

Nonetheless, it’s worthy of a dive into the open-ended fund, which trades under the symbol TFVCX. The fund shows a decline of 24.5% this year, versus the index at negative 2.94%, after a 6.3% loss last year, versus the index at positive 2.65%, according to Bloomberg data and the S&P U.S. Issued High Yield Corporate Bond Index.

It’s an alternative fixed-income fund that’s “extremely concentrated,” and “hardly representative of a ‘high yield’ or ‘junk bond’ fund,” outlined Brean Capital’s macro strategist Peter Tchir in a note to clients this morning. He highlighted that Bloomberg analytics show a portfolio that’s almost 50% unrated, nearly 45% tiered at CCC or lower, and just 6% of holdings rated BB or B.

The holdings are all fairly to extremely off-the-run, hence the trouble selling assets to meet redemption, and thus, the liquidation. The remaining assets have been placed into a liquidating trust, and interests in that trust will be distributed to shareholders on or about Dec. 16, 2015, according to the company.

Top holdings follow, and none have traded actively or very much in size of late, trade data show:

  • Energy Future Intermediate Holdings 11.25% senior PIK toggle notes due 2018; recent trades in the Ch. 11 paper were at 107.5.
  • Sun Products 7.75% senior notes due 2021; recent trades were at 87.5, versus 90 a month ago and the low 70s a year ago.
  • iHeartCommunications 14% partial-PIK exchange notes due 2021; block trades today were at 30 and 32, from 27 last month.
  • New Enterprise Stone & Lime 11% senior notes due 2018; odd lots traded recently in the low 80s, versus mid-80s last month.
  • Liberty Tire Recycling 11% second-lien PIK notes due 2021 privately issued in an out-of-court restructuring; trades reported in the mid-60s.

Amid those any many others of a similar ilk, the fund also reports a holding in Vertellus B term debt due 2019 (L+950, 1% LIBOR floor). The chemicals credits put the $455 million facility in place in October 2014 as part of a refinancing effort, pricing was at 96.5, and it’s now at 78/82, sources said.

“Investor requests for redemption … in addition to the general reduction of liquidity in the fixed income markets, have made it impracticable for FCF going forward to create sufficient cash to pay anticipated redemptions without resorting to sales at prices that would unfairly disadvantage the remaining shareholders,” according to the company statement.

“In line with its investment approach, FCF has some investments in companies that have undergone restructurings in the last eighteen months, and while we believe that these investments are likely to generate positive returns for shareholders over time, if FCF were forced to sell those investments immediately, it would only realize a portion of those investments’ fair value given current market conditions,” the statement outlined.

Further details are available online at the Third Avenue Management website. — Matt Fuller

Follow Matthew on Twitter @mfuller2009 for leveraged debt deal-flow, fund-flow, trading news, and more.


Huge high yield bond fund outflows: Why it’s not as bad as it seems


An LCD News story earlier today passed on incorrect information from data administrator Lipper regarding the Third Avenue Focused Credit fund that halted redemptions and is being liquidated. There was, in fact, a $111 million redemption from that fund this past week. A corrected story follows:

U.S. high-yield funds saw a net $3.5 billion retail cash withdrawal in the week ended Dec. 9, marking the largest one-week redemption since the record $7.1 billion outflow 70 weeks ago, or since the week ended Aug. 6, 2014, but it’s not as bad as it seems. Lipper today clarified with LCD that mutual funds this past week reported large seasonal distributions, but reinvestment has not yet been recognized, so it’s essentially a mid-read and look for a “catch up” in the weeks ahead.

This is a time of year when distributions “wreak havoc” with the flows data, according to Lipper. It’s possible that we’ll see the reinvestment characterized as inflows next week, but there also may be more distributions, Lipper added.

As per the flurry of news surrounding the liquidation of the alternative fixed income mutual fund Third Avenue Focused Credit, Lipper relayed that the fund-management group overall reported multiple outflows this past week, with $111 million specifically pulled from that open-ended fund. (LCD subscribes to weekly fund flow data from Lipper, but cannot see inside the aggregate observation.)

As for the one-week figure, see “US HY funds report largest cash outflow since record 70 weeks ago,” LCD News, Dec. 10, 2015. — Matt Fuller

Follow Matthew on Twitter @mfuller2009 for leveraged debt deal-flow, fund-flow, trading news, and more.


High yield bond prices fall further as some constituents notch large declines

The average bid of LCD’s flow-name high-yield bonds fell 132 bps in today’s reading, to 89.03% of par, yielding 10.58%, from 90.35% of par, yielding 10.05%, on Nov. 19. Performance within the 15-bond sample was deeply negative, with 12 decliners against two gainers and a lone constituent unchanged.

Today’s decline is a seventh-consecutive observation in the red, and it pushes the average deeper below the previous four-year low of 91.98 recorded on Sept. 29. As such, the current reading that has finally pierced the 90 threshold is now a fresh 49-month low, or a level not seen since 87.93 on Oct. 4, 2011.

The decrease in the average bid price builds on the negative 58 bps reading on Thursday for a net decline of 190 bps for the week. Last week’s losses were also heavy, so the average is negative 369 bps dating back two weeks, and the trailing-four-week measure is much worse, at negative 545 bps.

Certainly there has been red across the board, but several big movers of late continue to greatly influence the small sample. For example, in today’s reading, Intelsat Jackson 7.75% notes were off six full points—the largest downside mover today, to 44, and now 20.5 points lower on the month—while Hexion 6.625% paper was off five points, at 73.5, and Sprint 7.875% notes fell 5.5 points, to 77.

The market has been crumbling especially hard this week, with energy and TMT credits leading the charge, amid a lack of participation, the influence of speculative short-sellers, and despite signs that retail cash has been flowing into the asset class. There was a similar dynamic after Thanksgiving last year, sending the average to the year-end low of 93.33 on Dec. 16, 2014.

As for yield in the flow-name sample, the plunge in the average price—with many names falling into the 80s and a couple of others more deeply distressed—has prompted a surge in the average yield to worst. Today’s gain is 53 bps, to 10.58%, for a 2.92% ballooning over the trailing four week. This is a 13-month high and level not visited since 10.70% recorded on June 10, 2010.

The average option-adjusted spread to worst pushed outward by 47 bps in today’s reading, to T+791, for a net widening of 167 bps dating back four weeks. That level represents a wide not seen since the reading at T+804 on Sept. 23, 2010.

Both the spread and yield in today’s reading remain much wider than the broad index. The S&P U.S. Issued High Yield Corporate Bond Index closed its last reading on Monday, Nov. 23, with a yield to worst of 7.88% and an option-adjusted spread to worst of T+652.

Bonds vs. loans
The average bid of LCD’s flow-name loans fell nine bps, to 96.31% of par, for a discounted loan yield of 4.42%. The gap between the bond yield and discounted loan yield to maturity is 616 bps. — Staff reports

The data

Bids fall: The average bid of the 15 flow names dropped 132 bps, to 89.03.
Yields rise: The average yield to worst jumped 53 bps, to 10.58%.
Spreads widen: The average spread to U.S. Treasuries pushed outward by 47 bps, to T+791.
Gainers: The larger of the two gainers was Valeant Pharmaceuticals International 5.875% notes due 2023, which rebounded 3.25 points from the recent slump, to 85.25.
Decliners: The largest of the 12 decliners was Intelsat Jackson 7.75% notes due 2021, which dropped six full points, to 44, amid this fall’s ongoing deterioration of the credit.
Unchanged: One of the 15 constituents was unchanged in today’s reading.


With Veritas in Mind, Leveraged Loan, High Yield Bond Issuers Proceeding Cautiously

leveraged finance issuance

The U.S. leveraged finance market logged $8.2 billion in new-issue volume last week, $2.75 billion from leveraged loans and $5.45 billion in high yield bonds, according to S&P Capital IQ LCD.

That’s the smallest amount since the end of the summer, as leveraged loan players, in particular, proceeded deliberately last week after Veritas cancelled a planned $5.3 billion debt package backing Carlyle’s LBO of the company.

The high yield market also had Veritas in mind, though a host of issuers drove by the market last week to complete deals, according to LCD’s Matt Fuller. – Staff reports



JC Penney plans RC increase to pay off asset-based term loan

J. C. Penney will pay off its asset-based term loan with proceeds from an increase to its asset-based revolver. The term loan – which totals roughly $495 million – was set to mature in June 2019.

The $500 million increase will take the retailer’s asset-based revolver to $2.35 billion. Wells Fargo, J.P. Morgan, Barclays, Bank of America Merrill Lynch, Citizens Bank, Regions Bank, and HSBC are arranging the revolver increase. Closing is expected in December.

The ABL term loan is priced at L+400, with a 1% LIBOR floor.

J.C. Penney last week reported results for its third quarter ended Oct. 31, reporting net sales of $2.88 billion, up from $2.80 billion in the same quarter last year, and ahead of the S&P Capital IQ average estimate of $2.86 billion. Same-store sales increased 4.1%. The company’s operating loss of $38 million in the latest quarter represents a 46% improvement from last year. Adjusted EBITDA was $134 million, up from $39 million in the year-ago quarter, and above the S&P Capital IQ estimate of $107 million.

Looking ahead, the company improved its SG&A and EBITDA guidance for the remainder of 2015. EBITDA is estimated at $620 million for the full year, compared to previous expectations of $600 million. SG&A expenses are expected to decrease by roughly $120 million, an improvement from the prior forecast for a $100 million decrease, filings show.

The Plano, TX.-based company is rated CCC+/Caa2, with positive and stable outlooks, respectively. — Staff reports


Scientific Games bonds slip further on CFO resignation

Bonds backing Scientific Games slipped further today after the company announced the resignation of its Chief Financial Officer, Scott Schweinfurth, according to a company release. The 10% notes due 2022 shed 2.5 points to 77.625, yielding 15%, according to trade data. Meanwhile, sources quote the 7% notes due 2022 at 96/97, down from trades at 97.50 on Friday. The company’s shares are down nearly 4% at $7.62 today.

As reported last week, Scientific Games debt and equity came under pressure after the gaming technology company released third-quarter results that came in shy of Street expectations. The 10% notes, for instance, had been trading in the high 80s prior to the earnings release, before shedding five points on the results to the mid-80s and ending the week at an 80 context.

Loans backing Scientific Games are little changed today, with the B-2 tranche due 2021 (L+500, 1% LIBOR floor) recently marked at 92.75/93.75, though note the loan is about 5.5 points lower since the earnings release. According to the statement, Schweinfurth will continue in his role through the year-end financial audit and filing of its Form 10-K and the appointment of his successor.

Conditions are soft today in the high-yield market, with the cash market down about a quarter of a point and ETF sellers circulating, sources relay. The HY CDX 25 is quoted at 101.25, unchanged today, but down 1.3% week-over-week.

B+/B2 Scientific Games placed the $950 million issue of 7% secured notes and a $2.2 billion issue of 10% unsecured notes in November 2014 via a J.P. Morgan–steered underwriting team to help fund the Bally acquisition. The company also placed the $2 billion B-2 term loan in September 2014 to support the Bally transaction; the loan was issued at 99. Bank of America Merrill Lynch is administrative agent on the term loan. —Staff reports