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Leveraged loan market observations, California edition: Demand, bubbles, record CLOs

On my annual August West Coast swing I was privileged to have many informative discussions with our friends on the buy-side — including at Los Angeles’ Chavez Ravine, while watching Clayton Kershaw lead the Dodgers to a win over the Angles. What follows is a summary of the insights I was able to glean, which I pass along with as little editorializing as possible.

The buy-side is in the drivers seat
Clearly, managers have adjusted to today’s new normal, in which they are able to control pricing discussions. The reasons are well known. To summarize: Hot money is out of the asset class, for now. Retail flows are negative. High yield accounts are selling. And institutional investors have pulled in their horns for the same reason as have retail investors – a combination of bad press, duration fatigue and the overall risk-off posture of the market.

Bubble trouble?
There’s a broad consensus that terms and conditions are stretched, and debt multiples are pushing into an uncomfortable zone. Will there be another default spike in the years to come, as a result? Of course. Credit cycles have existed since the ancient Sumer civilization supposedly invented debt 3,500 years before Christ.

Given the solid economic outlook, however, an organic catalyst seems like a remote possibility in the near term. That does not dismiss an exogenous shock that sinks the global economy into recession (there are plenty of flash points around today to make such a risk more than idle). But even in that case most issuers can eat out of their own refrigerator, at least for a time, as a result of wide coverage ratios.

Underwriting calendar/CLO warehouses
One big way managers observe that the current period is far different than 2007 is a lack of overhang. Naturally, there is a wide array of CLO warehousing, but warehouse lines are far less vulnerable — from a bank’s perspective — because of large first-loss positions required of equity investors. As well, the underwriting calendar today of roughly $40 billion in M&A loans is a fraction of the roughly $350 billion that loomed over the market – and banks’ liquidity – when the fecal matter hit the rotor device in 2007.

CLOs
A record year of $100 billion is in the book already, managers say, based on the year-to-Aug. 11  total of roughly $79 billion. The number could go a lot higher — perhaps upwards of $125 billion — given managers’ ability to source sub-par paper in the secondary, and the decent flow of new-issue on tap.

Retail flow
This will remain mostly negative until there’s some meaningful pick-up in rates. That said, 2015 could be a huge year for inflows if the Fed does, as expected, finally start raising rates.

Institutional mandates
Pension funds and other institutional investors have put the brakes on credit, and what mandates are in process are of the “go-anywhere” variety, that allows managers’ discretion to invest across products and regions.

To sum it up, I’d say for CLO managers these seem to be the best of times. They would not like to see further deterioration that would scare equity investors from the field. But the current state of play is highly conducive to ramping and printing deals (as the volume numbers attest). As for retail managers and those hunting for institutional mandates, it is not the worst of times, by a long shot. But it could be better.

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Leveraged Loans: 2014 European CLO issuance tops full-year 2013 total

EUR CLO issuance 2014-08-06

European CLO issuance in the year to date has reached €7.7 billion following the two recent pricings from ICG and Avoca Capital (subscriber links). This year’s supply has now eclipsed the €7.4 billion issued for the whole of 2013, and puts the market well on track to meet analysts’ full-year supply forecasts of €10-15 billion. – Sarah Husband

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July CLO market: $10B in U.S. issuance, and counting …

global CLO volume
Issuance in the U.S. CLO market continued apace last week, even with August right around the corner. Four new-issue deals priced, totaling some $2.21 billion, with more expected this week. With no new deals pricing in Europe, global CLO issuance year to date stands at $80.6 billion.

This chart is part of a longer LCD analytical story, available to LCD News subscribers. It includes charts detailing U.S. arbitrage CLO issuance vs. U.S. institutional loan volume, the U.S. CLO deal pipeline for what’s left of July, a European CLO deal pipeline, and European arbitrage CLO issuance vs. European institutional loan volume.

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Balancing act: Loan technicals firm in June as supply matches demand

Conditions in the loan market firmed in June as record CLO volume and slower supply growth offset rising retail outflows, balancing the market’s technical scale.

In what may be a first, net new supply of S&P/LSTA Index loans exactly matched visible inflows from CLO formation and loan mutual fund flows, at $8.7 billion each. That is a far cry from May’s $12 billion technical deficit, the most red ink the market has seen since November 2007.

As this chart shows, the big technical story of June was a sharp drop in supply growth. Though the universe of S&P/LSTA Index loans reached a record $756 billion during the month, it was the smallest dollar increase since January, and well inside the average of $15.3 billion from the prior three months.

LCD subscribers can click here to access full story, analysis, and the following charts:

  • Par amount outstanding of the S&P/LSTA Index
  • CLO issuance
  • Total net asset value of prime funds at month-end
  • Average bid of the S&P/LSTA Index
  • Average new-issue yield to maturity for leveraged loans
  • Repricing volume by month
  • Institutional M&A forward calendar


– Steve Miller

Follow Steve on Twitter for an early look at LCD analysis, plus market commentary.

 

 

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Leveraged loan funds report eighth consecutive week of outflows

Cash outflows for bank loan funds increased to $457 million in the week ended July 2, from $424 million the previous week, but were well below the $1.2 billion three weeks ago, according to Lipper.

This is the eighth consecutive outflow, for a net $4.94 billion withdrawal over that span, representing the largest multiweek depletion since a run of outflows in August 2011. Extrange-traded fund inflows of $28 million barely offset outflows from mutual funds of $485 million.

The outflow marks the eleventh weekly withdrawal in the past 12 weeks, a stretch that put an end to a 95-week inflow streak totaling $66.7 billion.The trailing four-week reading moves to negative $618 million per week, from negative $779 million last week and $792 million two weeks ago.

Year-to-date inflows now total just $1.2 billion, of which $804 million, or 70% of the sum, is ETF-related. In the comparable year-ago period, inflows were $28 billion, with 12% tied to ETFs.

The change due to market conditions was positive $323 million this week compared to total assets of $108.8 billion at the end of the observation period, with ETFs comprising $8.2 billion of the total, or approximately 8%. – Joy Ferguson

loan_flow_7.3

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Leveraged loan funds report eighth consecutive week of outflows

Cash outflows for bank loan funds increased to $457 million in the week ended July 2, from $424 million last week, but were well below the $1.2 billion three weeks ago, according to Lipper.

This is the eighth consecutive outflow, for a net $4.94 billion withdrawal over that span, representing the largest multiweek depletion since a run of outflows in August 2011. Extrange-traded fund inflows of $28 million barely offset outflows from mutual funds of $485 million.

The outflow marks the eleventh weekly withdrawal in the past 12 weeks, a stretch that put an end to a 95-week inflow streak totaling $66.7 billion.The trailing four-week reading moves to negative $618 million per week, from negative $779 million last week and $792 million two weeks ago.

Year-to-date inflows now total just $1.2 billion, of which $804 million, or 70% of the sum, is ETF-related. In the comparable year-ago period, inflows were $28 billion, with 12% tied to ETFs.

The change due to market conditions was positive $323 million this week compared to total assets of $108.8 billion at the end of the observation period, with ETFs comprising $8.2 billion of the total, or approximately 8%. – Joy Ferguson

LonaFund_7.2

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Cash withdrawals from leveraged loan funds moderate in 6th straight outflow

Cash outflows for bank loan funds moderated to $369 million in the week ended June 18, from $1.2 billion last week and $1.1 billion two weeks ago, according to Lipper. This is the sixth consecutive outflow, for a net $3.7 billion withdrawal over that span, representing the largest multi-week depletion since a run of outflows in August 2011.

The influence of exchange-traded fund outflows was minimal, at 5% of the sum, or $20 million, though that was up from 2% of the outflow last week.

The outflow marks the ninth weekly withdrawal in the past 10 weeks, a stretch that put an end to a 95-week inflow streak totaling $66.7 billion.

The trailing four-week reading contracts to negative $792 million per week, from negative $859 million last week. Last week’s observation in this statistic was the deepest since the week ended Sept. 7, 2011.

Year-to-date inflows now total just $2 billion, of which $797 million, or 39% of the sum, is ETF-related. In the comparable year-ago period, inflows were $25.7 billion, with 13% tied to ETFs.

The change due to market conditions was positive $48 million this week. That’s barely measurable against total assets, which stood at $109.3 billion at the end of the observation period, with ETFs comprising $8.2 billion of the total, or approximately 8%.

LoanFundFlows6.18

– Matt Fuller

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

 

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Leveraged loans: 2Q US CLO issuance on track to top 2007 record

The U.S. CLO market continues to break through previous records as supply just keeps on rolling.

With two weeks left to go, managers have inked $32.7 billion of new vehicles so far in the second quarter. At this rate, the current period will surpass the second quarter of 2007, which saw $32.8 billion of CLO formation, on the all-time leaderboard, making it the largest quarter ever, according to LCD. – Sarah Husband

To read full article and analysis,which includes CLO issuance forecasts from market pros, LCD subscribers can click here.