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From bad to worse: Leveraged loan managers fret as investor cash dwarfs new deal flow

leveraged loan technicals

For leveraged loan managers trying to put money to work in the loan asset class, the technical environment went from bad to worse in April. It was simply a case of too much capital chasing too few opportunities, as visible inflows exceeded net new supply by $11.2 billion, following March’s record demand surplus of $19.8 billion.

The ongoing supply drought is largely responsible for today’s technical strength. In April, the universe of S&P/LSTA Index loans contracted by $418 million, to $837.8 billion, after dropping $4.4 billion in March. It was the first back-to-back months of shrinking supply in three years – Steve Miller

twitter iconFollow Steve on Twitter for leveraged loan news and insights.

This analysis is part of a longer story, available here to LCD News subscribers, that also details

  • Leveraged loan outstandings
  • M&A loan volume
  • Monthly loan repayments
  • CLO issuance
  • Loan fund flows
  • Leveraged loan secondary prices
  • Leveraged loan yields
  • Repricing volume
  • Leveraged loan forward calendar

 

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US Leveraged Loan Funds See $530M Cash Inflow; Largest in 1 Year

US leveraged loan fund flows

 

Bank loan mutual funds and ETFs reported a $530 million inflow for the week ending April 15, the first inflow in eight weeks, and the largest inflow in 58 weeks. This compares to an outflow of $4 million in the prior week, according to Lipper.

The week’s inflow is a combination of a $333 inflow to mutual funds along with a $197 million inflow to exchange-traded funds, so ETFs represent 37% of the total. This is the second positive reading on the ETF segment in six weeks, with the four previous representing net outflows from ETFs.

There has been a total of $777 million of inflows recorded over the last 54 weeks from just four of the individual weeks, versus $28.3 billion of outflows. With today’s inflow, the year-to-date outflow deepens to $3.3 billion, with negative 3% tied to ETFs, versus an inflow of $6.7 billion at this point last year, with positive 16% tied to ETFs.

With a strong infusion of fresh cash, the trailing four-week average was moderates to just negative $52 million, from negative $241 million last week, and negative $248 million two weeks ago. Recall that the negative four-week observation 15 weeks ago, at $1.3 billion, was the deepest in roughly 3.5 years, or since the week ended Aug. 31, 2011.

In today’s report, the change due to market conditions was a positive $177.9 million, which represents roughly a 0.2% gain against total assets, which were $93.8 billion at the end of the observation period. The ETF segment comprises $7 billion of the total, or approximately 7% of the sum. – Joy Ferguson

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Capitala and Kemper form new loan-focused JV fund

Business-development company Capitala Finance Corp. has formed a new investment joint venture with Trinity Universal Insurance Company, a subsidiary of Kemper Corp. The new venture, Capitala Senior Liquid Loan Fund I, will focus on investments in broadly syndicated loans beginning in the second quarter.

The initial equity contribution is $25 million, of which Capitala is funding $20 million and Trinity is providing $5 million. In addition to that the new fund secured third-party asset-level financing.

Capitala Finance, a BDC that trades on the Nasdaq under the ticker CPTA, traditionally targets debt and equity investments in middle-market companies generating EBITDA of $5-30 million. The firm focuses on mezzanine and subordinated deals but also invests in first-lien, second-lien and unitranche debt. Capitala’s portfolio as of Dec. 31 consisted of 52 portfolio companies with a fair market value of $480.3 million. Of that total, 31% was senior secured debt investments, 46% was subordinated debt, and 23% was equity and warrants. – Jon Hemingway

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Leveraged loan funds see another $228M investor cash outflow

Bank loan outflows were grew to $228 million for the week ended March 18, versus outflows of $31 million in the prior week, according to Lipper. The latest outflow was split between mutual funds and ETFs, with mutual funds recording $160 million of the full amount, while ETF outflows continued for the second week in a row following a six-week period where ETFs reported inflows against mostly outflows at mutual funds.

leveraged loan fund flows

There has now been a total of $27.6 billion of outflows recorded over the last 49 weeks, with only three weeks seeing inflows over that span. The year-to-date outflow now sits at $3.1 billion, with 4% tied to ETFs, versus an inflow of $6.5 billion at this point last year, with 16% tied to ETFs.

The trailing four-week average fell to negative $143 million, from negative $54 million last week and negative $52 million two weeks ago. Recall that the negative four-week observation 12 weeks ago, at $1.3 billion, was the deepest in roughly 3.5 years, or since the week ended Aug. 31, 2011.

In today’s report, the change due to market conditions was negative $172.9 million, a change of 0.20% against total assets, which were $92.6 billion at the end of the observation period. The ETF segment comprises $6.7 billion of the total, or approximately 7%. – Joy Ferguson

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CLO roundup: At $3.91B, US mart sees busiest week of 2015 so far

global CLO volume

Last week was the busiest of the year for the U.S. CLO market, with seven new CLOs printing for $3.91 billion. Other busy weeks this year include the week ended Feb. 6, in which seven deals printed for $3.53 billion, and the week ended Jan. 30, in which six deals printed for $3.44 billion, according to LCD.

Europe also saw a new print, and from a first-time manager to boot. – Sarah Husband

After the busy week, year-to-date statistics are as follows:

  • Global volume rises to $20.79 billion.
  • U.S. CLO volume rises to $18.44 billion for 34 deals, versus $14.20 billion for 28 deals in the same period last year.
  • European CLO volume rises to €2.08 billion for five transactions, versus €1.65 billion for four deals in the same period last year.

Follow Sarah on Twitter for CLO news and insight.

You can read more about the CLO market here, in LCD’s Leveraged Loan Primer/Almanac.

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Invesco prices $618M CLO via Morgan Stanley; YTD volume: $12.45B

Morgan Stanley has priced a $618 million CLO for Invesco Senior Secured Management, according to market sources.

The transaction is structured as follows:

The non-call period is 1.5 years, and the reinvestment period is 4.1 years.

Including this transaction, CLO issuance in the year to date rises to $12.45 billion from 23 transactions, according to LCD. Fourteen CLOs have priced in February for $7.3 billion. – Sarah Husband

Follow Sarah on Twitter for CLO market news and insight.

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Outflows to US leveraged loan funds dwindle to $25M; ETFs gain

us loan fund flows

Cash outflows from bank loan funds were just $25 million for the week ending Feb. 11, marking the lowest outflow reading since the week ending April 23, 2014, and not including two weeks of inflows within that time frame, according to Lipper.

This week’s outflow compares to outflows of $511 million and $443 million in the previous two weeks. For a third consecutive week, the redemption was offset by inflow to the exchange-traded-fund segment, at $31.4 million this week compared to just $579,000 last week.

The latest outflow represents the 31st consecutive weekly withdrawal and the 42nd outflow in 44 weeks, for a net redemption of $27 billion over that span.

The trailing four-week average declines to negative $429 million for the week, from negative $572 million last week and negative $537 million two weeks ago. The negative observation seven weeks ago, at $1.3 billion, was the deepest in roughly 3.5 years, or since the week ended Aug. 31, 2011.

The net $2.7 billion outflow for the first six weeks of the year, with 2% ETF-related, is in contrast to last year, which showed a net inflow of $4.2 billion for the same period, with 12% ETF-related. For the full-year 2014 outflows were roughly $17.3 billion, with ETFs representing about 3% of that total, or $516 million.

In today’s report the change due to market conditions was positive $306 million, or roughly 0.35% against total assets, which were $86.8 billion at the end of the observation period. The ETF segment comprises $6.8 billion of the total, or approximately 8%. – Joy Ferguson

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Leveraged loan funds see 30th straight investor cash outflow – $511M

Cash outflows from bank loan funds were fairly steady, at $511 million, for the week ending Feb. 4, versus $443 million last week and $738 million prior, according to Lipper. For a second consecutive week, however, the redemption was tempered by a small inflow to the exchange-traded-fund segment, at just under $1 million.

leveraged loan fund flowsThe latest outflow represents the 30th consecutive weekly withdrawal and the 41st outflow in 43 weeks, for a net redemption of $26.9 billion over that span.

The trailing four-week average expands modestly, to negative $572 million, for the week, from negative $537 million last week and negative $684 billion two weeks ago. The observation seven weeks ago, at $1.8 billion, was the deepest in roughly 3.5 years, or since the week ended Aug. 31, 2011.

The net $2.7 billion outflow for the first five weeks of the year, with 3% ETF-related, is in contrast to last year, which showed a net inflow of $3.6 billion for the same period, with 9% ETF-related. For the full-year 2014 outflows were roughly $17.3 billion, with ETFs representing about 3% of that total, or $516 million.

In today’s report the change due to market conditions was positive $392 million, or roughly 0.5% against total assets, which were $86.6 billion at the end of the observation period. The ETF segment comprises $6.7 billion of the total, or approximately 8%.

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

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LSTA issues CLO Refi Fact Sheet as market debates delayed-draw notes

There has been much focus on CLO refinancings recently, in particular where they concern U.S. risk retention regulation. On Friday the LSTA published a CLO Refinancing and Risk Retention Fact Sheet, which is designed to help market participants navigate the topic.

While CLOs issued before the Dec. 24, 2016 effective date for U.S. risk-retention regulation are grandfathered, many are concerned that any opting to refinance after that date will lose that grandfathered status – although there is much confusion around this point.

In its CLO Refinancing Fact Sheet, the LSTA says that while it is not clear how refinancings will be treated under the new risk-retention rules, it does not believe they should be considered a new securitisation transaction or regarded as a ‘work around’ for retention requirements under Dodd-Frank.

Meanwhile, in its January OnPoint, Dechert outlines the technical reasons why a CLO refinancing might cause the transaction to be caught by the regulation. While Dechert doesn’t believe the relevant agencies intended to subject CLO refinancings to the ‘Final Rule’, the technicalities around what constitutes a securitization transaction mean that a refi where new securities are issued could get caught up in the regulation. So absent any further clarification from the agencies, Dechert believes the market will operate as if a refi will fall within the scope of the Final Rule.

And that is what the market appears to be doing – with time and effort spent looking for ways to solve the potential refi issue. Sources suggest that while the CLO issuer and its investors may not ultimately look to utilise these ‘solutions’, they may be included in a transaction’s documentation to provide the parties involved with options.

The majority have opted to structure transactions with shorter non-call periods to allow for a refinancing to take place ahead of the effective date.

However, the number of managers using this option – this year CVC Credit Partners (Apidos XX), CVP CLO Manager (CVC Cascade CLO-3), and Prudential (Dryden 37) have structured CLOs with a shorter non-call periods, joining the 16 or so from last year – reduces the likelihood of this being a viable option for CLO managers, which would also need CLO liability spreads to tighten significantly to make the refinancing feasible.

The past few weeks have seen an increasing number of transactions price with non-call periods that fall after the effective date – Guggenheim (NZCG Funding), PineBridge (Galaxy XIX), 3i Debt Management US (Jamestown CLO VI), GSO/Blackstone Debt Management (Dorchester Park), and Apollo (ALM XII) – suggesting other options are being used.

Some managers have explored removing the refinancing option altogether in exchange for reducing the AAA coupon, and therefore improving the day-one economics for the equity.

Others still are considering the use of ‘delayed draw notes,’ whereby the notes issued in a refi are included in the original documentation. The solution is understood to have already been used in a U.S. CLO, according to Bloomberg, which reports that Apollo is among those managers that have used the strategy in its ALM XII CLO transaction, while sources say other managers are looking at its potential.

However, as is becoming the norm with more creative solutions to the issue, whether the approach will be deemed to comply with the regulation is being heavily scrutinised and debated.

While it’s not clear how the regulators are going to come down on the regular refinancings – due to the murkiness surrounding the fact no new loans are being securitized, but there are new notes being issued – the delayed-draw option may be considered a cleaner strategy.

“By taking this step and issuing securities before the risk retention effective date, managers are attempting to ensure that no new issuance of securities occurs after the effective date and thus no new securitization takes place after the rules take effect. This simply aligns the legal structure of the transaction with its intent, i.e., merely a re-pricing of selected notes of the original CLO transaction,” says the LSTA. – Sarah Husband

Follow Sarah on Twitter for CLO market news and insight.

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US Leveraged loan funds see 29th straight week of investor withdrawals

Cash outflows from bank loan funds declined to $443.1 million for the week ending Jan. 29, according to Lipper. That’s down from $738.1 million last week and $593.7 million two weeks ago.

leveraged loan funds

Inflows from exchange-traded funds, at $11.2 million, slightly offset mutual fund withdrawals of $454.3 million. This is only the second ETF inflow in the last 16 weeks, according to Lipper, but the latest ETF outflows have been negligible. Recall that ETFs were very heavy, at 18% of the big withdrawal six weeks ago, and that was anomalous to almost every other reading during the year.

The latest outflow represents the 29th consecutive weekly withdrawal and the 40th outflow in 42 weeks, for a net redemption of $26.5 billion over that span.

The trailing four-week average moderates to negative $537 million for the week, from negative $684 million last week and negative $821 billion two weeks ago. The observation five weeks ago, at $1.3 billion, was the deepest in roughly 3.5 years, or since the week ended Aug. 31, 2011.

The net $2.1 billion outflow for the first four weeks of the year, with 3% ETF-related, is in contrast to last year, which showed a net inflow of $3.4 billion for the same period, with 10% ETF-related. For the full-year 2014, outflows were roughly $17.3 billion, with ETFs representing about 3% of that total, or $516 million.

In today’s report, the change due to market conditions was slightly negative, at $31.7 million, or -0.04% of total assets, which were $86.7 billion at the end of the observation period. The ETF segment comprises $6.7 billion of the total, or approximately 8%. – Joy Ferguson