With the markets rallying and the 10-year Treasury rate ticking down to 1.67%, from 1.85% at the end of March, loans lagged the other four asset classes tracked monthly by LCD (equities, high-yield bonds, 10-year Treasuries, and investment-grade corporate bonds). In the year to date, loans continue to outpace investment-grade bonds and Treasuries while lagging equities and high-yield bonds.
Before getting into our usual market analysis, let’s review the state of play for the loan market in the first quarter of 2013.
With the bulls running, issuers flooded the zone to refinance seasoned loans and finance dividends. Leveraged loan volume climbed, therefore, to a post credit crunch high of $185 billion between January and March. Most of this issuance, however, was churn. Refinancings, in fact, accounted for nearly two-thirds of the total. As a result, the loan market’s technical equation tilted further in favor of issuers as we discuss in the slides ahead.
Muscular market conditions lifted the average price of S&P/LSTA Index loans by about five-eighths in March to a post-2007 high of 98.2 percent of par. In response, the Index gained 82 bps during the month, pushing loan returns for the first three months of the year to 2.1%.
Demand caught fire in March. CLO issuance pushed to a six-year high of 10.7 billion dollars during the month and retail investors put an estimated 6 billion dollars to work into loan funds, based on data from EPFR and Lipper.
On the other side of the ledger, net supply of outstanding loans expanded about $6 billion, to a recent high of $561 billion. Even including the $9.5 billion Heinz loan, which allocated in March but won’t fund for several months, supply still lagged demand in March.
This technical imbalance notwithstanding, new-issue clearing yields were stable in March as arrangers brought forth more challenging transactions. By any measure, however, the primary market remains issuer friendly with BB loans printing in a 3.5% context and single B’s in a 4.5-5.5% band.
For the same reason, covenant-lite loan issuance hit the tipping point during the open months of 2013, accounting more than half of new-issue institutional loan volume for the first time. As a result, such loans now account for a third of the S&P/LSTA Index up from 30% at yearend.
Turning to credit conditions, the market was haunted in March by three defaults from cycles past, all out of the directories sector. Together, these defaults totaled $4 billion, the largest monthly figure since October 2009. For this reason, the default rate climbed to a 28-month high of 2.2%, from 1.3% at year-end. Managers expect the rate to ease to 1.8% or so by December according to LCD latest buy-side poll taken in mid-March.
Looking ahead, participants expect loans’ positive bias to persist.
On the one hand, arrangers say front-end LBO activity is still lackluster, suggesting supply will continue to lag.
On the other hand, loan demand remains strong.
Certainly, retail and institutional investors continue to embrace the asset class.
And, though CLO issuance may take a breather after March’s outburst, managers expect a steady flow of deals.
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It was an active month in European leveraged finance. European leveraged loan issuance grew to €7.5 billion in January while high yield bond issuance was €7.1 billion. The secondary markets were up, as well.
LCD’s video analysis detailing the European leveraged finance market during January and early February is now on YouTube.
This month LCD looks at:
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Today’s announcement of Dell’s $24 billion LBO has also provided investors with optimism that the emergence of a multibillion dollar debt package could bring today’s technically lopsided market closer to equilibrium and, in turn, put a damper on the surge of repricing activity that has dominated the primary market over the past few weeks.
Expectations are that the new deal, which is being arranged by Bank of America Merrill Lynch, Barclays, Credit Suisse and RBC Capital Markets, will include a multibillion dollar covenant-lite term loan execution as well as a large high-yield bond deal. Specifics haven’t emerged, however BAML is expected to have a left lead role on the loan transaction, while Credit Suisse would be left lead on the bond execution. As disclosed, Microsoft will provide an additional $2 billion of debt, while a portion of Dell’s roughly $9 billion of debt, largely bonds, would remain in place.
The buyout deal is subject to a 45-day go-shop period, so few specifics are expected to emerge immediately on the debt financing. However, the expectation of a large new deal may prompt some loan accounts to hold their powder, or even trade out of lower-yielding deals in preparation for the large new investment opportunity.
Loan investors have been reeling in recent days from the repricing push that’s emerged amid a vacuum of true new-issue paper. However, there are signs of fatigue among investors.
Some of the more recent aggressively priced transactions have been hovering around their issue prices: B/B1 Go Daddy’s TLB due 2018 (L+325, 1% LIBOR floor), for example, is wrapped around its par offer price this morning, while B+/B1 IMS Health’s dollar-denominated TLB due 2017 (L+275, 1% floor) was quoted at 100/100.5, versus issuance at par. And Berry Plastics’ $1.4 billion TLD due 2020 (L+250, 1% floor), though not a repricing, was the tightest print for a B/B2 borrower since the credit crisis, has cooled to 99.625/99.875, from issuance at par yesterday.
Dell’s LBO transaction will be financed through a combination of cash and equity contributed by Mr. Dell, cash funded by investment funds affiliated with Silver Lake, cash invested by MSD Capital, L.P., a $2 billion loan from Microsoft, rollover of existing debt, as well as debt financing.
Under the terms of the agreement, Dell stockholders will receive $13.65 in cash for each share of Dell common stock they hold, in a transaction valued at approximately $24.4 billion. The price represents a premium of 25% over Dell’s closing share price of $10.88 on Jan. 11, 2013, the last trading day before rumors of a possible going-private transaction were first published; a premium of roughly 35% over Dell’s enterprise value as of Jan. 11, 2013; and a premium of roughly 37 % over the average closing share price during the previous 90 calendar days ending Jan. 11, 2013. The buyers will acquire for cash all of the outstanding shares of Dell not held by Mr. Dell and certain other members of management.
The transaction is subject to other customary conditions, including receipt of required regulatory approvals, in addition to the Dell stockholder approvals described above. The transaction is expected to close before the end of the second quarter of Dell’s fiscal-year 2014. – Staff reports
Citigroup today priced a $513.2 million CLO for Golub Capital Partners, according to sources.
The CLO, which includes a 25% basket for middle-market loans, is structured as follows:
This monthly overview details European leveraged finance trends and activity during December 2012, and indicates projections for the upcoming months.
December and 2012 recap:
Secondary markets – Leveraged loans:
Focusing on the secondary loan market, this chart details the average price of LCD’s European Loan flow name composite – a measure of the 12 largest, most liquid loans (consisting of 10 issuers) – since 2002.
With primary issuance at nil, the focus turned to the secondary market: secondary loan prices rose 51 bps to finish the month at 97.34. Year to date, loan prices have risen 223 bps.
Secondary markets – High yield bonds:
This next chart details the average price LCD’S European High Yield Flow name composite- a measure of the 12 most liquid high yield issues – since the beginning of the year 2010.
The high yield market finished the month at 103.04 up 223 bps, year-to-date high yield bond prices have risen 13 points (1304 bps)
ELLI:
This chart details the monthly return of the ELLI, a broad measure of European loan market returns that LCD calculates. All returns are ex-currency unless otherwise stated.
The European loan market had a positive return of 0.72% for the month of December , up from the 0.66% in November.
The total ELLI return for 2012 is positive 9.48% versus negative 0.02% for the same period last year.
Primary market:
Now we turn from the secondary to the primary. This graph details new-issue volume for both leveraged loans and high-yield bonds.
December saw European monthly loan volume fall to nil as arrangers focused their attention to the burgeoning January launch pipeline as well as close deals that were launched in November. Loan issuance for 2012 stood at €28.5 from 105 transactions. Compared €43.54 billion from 140 deals in 2011.
High-yield bond issuance was €1.5 billion bringing 2012 high yield issuance to €36.4 billion from 108 deals. This is slightly ahead of the €35.7 billion from 103 deals seen in 2011.
Default rate:
The default rate by principal amount rose to at 6.6% at the end of December from 6.3% at the end of November 2012 versus 4.09% at the end of December 2012. The default rate by issuer count also jumped up to 8.5% in December from the 8% seen in November versus the 3.39% seen at the end of December 2012.
Themes to watch for going forward:
A video of this presentation is available at: http://youtu.be/BhdWS8qdY-4
Slideshare download is available at: http://www.slideshare.net/lcdcomps/january-2013-european-leveraged-loan-market-analysis
Loan prices climbed in December on the back of strong technical conditions. Looking ahead, participants expect demand to continue to lead supply in early 2013, allowing the bullish sentiment to persist.
Before diving into our usual monthly commentary, let’s review 2012’s headline numbers:
All in all, it was a strong year for loans. Bolstered by robust demand, benign credit conditions and a relatively calm macro picture, the S&P/LSTA Index posted a 9.6% as prices pushed ever closer to par. Amid this supportive environment, new-issue volume expanded to a five-year high of $465 billion, putting 2012 behind only 2006 and 2007 on the historical leaderboard. Meanwhile, with investors searching for yield, the number of active accounts buying loans also reached a five-year high of 268.
Getting back to recent trends, the loan market ended 2012 with on an up note:
Rising loan prices generated a 79 bps return for the S&P/LSTA Index. Levels were up further in early January. LCD’s flow name composite, a measure of the 15 most liquid names in the market, reached 99.8 on Jan 14, the highest reading since June of 2007.
As this implies, muscular demand prevailed in December mainly as a result of the resurgent CLO sector, which saw another $7 billion of new prints:
For all of 2012, CLO volume was $54 billion, a more than fourfold increase from 2011 and yet another five-year high. Mutual funds inflows also continued apace in December as retail investors sought out relative high yielding opportunities.
Rising supply didn’t keep pace with demand in December, reinforcing the market’s firm tone.
Still, the amount of S&P/LSTA Index loans outstanding grew to $550 billion at yearend, the most in 39 months.
With the market rallying, the average new-issue clearing yields of institutional loans sank to near post-credit crisis lows:
BB loans cleared in a 4 to 4.5% context while Single B loans printing in a 5.5-6% band.
In addition to printing tightly, issuers took advantage of hot market condition to drive covenant-lite loan volume to roughly 50% of overall institutional loan issuance in December, the most ever:
As a result, the percent of S&P/LSTA Index loans with only incurrence tests stood at a record 30% at yearend, up from 25% when 2011 drew to a close.
Switching gears, the loan default rate in December was effectively unchanged at 1.3%:
That is up from a near record low of 17 bps at the end of 2011 but about 2 percentage points inside the historical average. Looking ahead, managers expect default rates to reach 2% or so over the next 12 months.
To wrap things up, three final points:
Looking ahead, managers say capital continues to pour into the market from all quarters as investors look for floating-rate, wide-margin opportunities. The CLO pipeline remains chock-a-block while mutual fund inflows in early January were running at roughly $100 million a day. As well, pension funds and other institutional investors were still actively putting money to work in the space.
On the other side of the technical ledger, the calendar of new loan issues was light when 2013 opened. Arrangers expect LBO and other M&A-drive volume to pick up later in the first quarter, but for the time supply is constrained.
Finally, players continue to worry about all the obvious macro risks to the market, starting with the debt ceiling situation and continuing through all the hot spots around the globe. – Steve Miller
A video of this presentation is available at: http://www.youtube.com/watch?v=eErhR6T0lNI/
Slideshare download is available at: https://www.slideshare.net/lcdcomps/january-2013-us-leveraged-loan-market-analysis/
This monthly overview details European leveraged finance trends and activity during December 2012, and indicates projections for the upcoming months.
December and 2012 recap:
Secondary markets – Leveraged loans:
Focusing on the secondary loan market, this chart details the average price of LCD’s European Loan flow name composite – a measure of the 12 largest, most liquid loans (consisting of 10 issuers) – since 2002.
With primary issuance at nil, the focus turned to the secondary market: secondary loan prices rose 51 bps to finish the month at 97.34. Year to date, loan prices have risen 223 bps.
Secondary markets – High yield bonds:
This next chart details the average price LCD’S European High Yield Flow name composite- a measure of the 12 most liquid high yield issues – since the beginning of the year 2010.
The high yield market finished the month at 103.04 up 223 bps, year-to-date high yield bond prices have risen 13 points (1304 bps)
ELLI:
This chart details the monthly return of the ELLI, a broad measure of European loan market returns that LCD calculates. All returns are ex-currency unless otherwise stated.
The European loan market had a positive return of 0.72% for the month of December , up from the 0.66% in November.
The total ELLI return for 2012 is positive 9.48% versus negative 0.02% for the same period last year.
Primary market:
Now we turn from the secondary to the primary. This graph details new-issue volume for both leveraged loans and high-yield bonds.
December saw European monthly loan volume fall to nil as arrangers focused their attention to the burgeoning January launch pipeline as well as close deals that were launched in November. Loan issuance for 2012 stood at €28.5 from 105 transactions. Compared €43.54 billion from 140 deals in 2011.
High-yield bond issuance was €1.5 billion bringing 2012 high yield issuance to €36.4 billion from 108 deals. This is slightly ahead of the €35.7 billion from 103 deals seen in 2011.
Default rate:
The default rate by principal amount rose to at 6.6% at the end of December from 6.3% at the end of November 2012 versus 4.09% at the end of December 2012. The default rate by issuer count also jumped up to 8.5% in December from the 8% seen in November versus the 3.39% seen at the end of December 2012.
Themes to watch for going forward:
A video of this presentation is available at: http://youtu.be/BhdWS8qdY-4
Slideshare download is available at: http://www.slideshare.net/lcdcomps/january-2013-european-leveraged-loan-market-analysis
It will come as no surprise that leveraged finance volume – leveraged loan and high yield bond issuance – set a record in 2012, logging more than $800 billion in deals. The HY bond market did its part, to be sure, posting an unprecedented $346 billion during the year. Refinancings played a key role in both markets as issuers took advantage of sustained institutional investor cash to opportunistically redo deals.
There is much to be positive about when looking back at 2012. The European high-yield market grew, there were more new opportunities via debut issuers, appetite for periphery-exposed credits started to recover, and the asset class is on deck to finish the year with a whopping total return of 26.18%, through Dec. 13, based on the BofA ML European High Yield Index. Leveraged loans have also fared well. As of Dec. 13, YTD total return for the European Leveraged Loan Index (ELLI) stood at 9.78%, which is a significant improvement from last year, when the ELLI finished 2011 at 0.72%, and similar to 2010, when the Index returned 9.85%.
So far so good then, but the bad news is that a total return of more than 20% for high-yield is a difficult benchmark to top. In the secondary, this has meant that some prices are at their all-time highs, leaving a lot of room to the downside. At 102.75 (based on Bloomberg pricing), yielding 6.62%, LCD’s high-yield flow-name composite is at the highest level since mid-2011. The iTraxx Crossover Series 16 began the year at around 750 and tightened to 500 before rolling into Series 17, which widened out post-roll and hit a peak of 752 in May. Since then, Series 17 and then Series 18 have largely moved south, with the Crossover now marked below 450.
This chart is part of an LCD News analysis available to subscribers.
Other charts in that analysis: