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Final US risk retention has CLOs retaining 5% skin; equity throttle out

The terms of the final U.S. risk retention rule have been released, with little material change to the regulation with respect to CLOs, according to the LSTA.

This means that once the regulation goes into effect two years after it has been published in the Federal Register, CLO managers will have two methods by which to comply with the regulation, the manager as sponsor option or the arranger option.

Manager retention means the manager can retain 5% of the entire size of the CLO, vertically or horizontally.

The one piece of good news from the final rule is that the ‘cash throttle’ has been removed. This would have restricted the equity retention from receiving any payments before the notes began to amortise, which would have rendered retention via a horizontal piece unfeasible.

Loan arranger retention is where provided that the CLO buys 100% of eligible loan collateral, the manager would not have to retain 5% risk in the structure. Eligible collateral is defined as a loan tranche whereby the arranging bank retains 5% for the life of the loan. This is widely considered a non-option by market players given that banks are unlikely to agree to retain a portion of loans they underwrite for the purpose of the regulation.

The explicit third-party equity option has not been accepted, says the LSTA. Neither has the Qualified CLO concept or the expansion of the Qualifying Loan definition.

The FDIC votes on the regulation today, while the Federal Reserve will vote tomorrow.

All CLOs issued prior to the effective date are expected to be grandfathered.

Bram Smith, the LSTA’s executive director, today issued a statement expressing its disappointment with the final terms, which will “negatively impact American credit markets and make financing for U.S. companies more expensive and scarce.”

The statement continues, “Ironically, while the risk retention rule revealed today does not cover the vast majority of residential mortgages – one of the major sources of the financial crisis – the agencies have decided to proceed with a one-size-fits-all approach that unfairly harms CLOs, a historically safe financial product that in no way contributed to the financial crisis this rule aims to safeguard against in the future. In fact, CLOs performed exceedingly well throughout the financial crisis, and no investor has ever lost money on a senior CLO note.” – Sarah Husband

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Leveraged Loans: US braces for risk retention as volatility hits – CLOs

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Broader market volatility gave the CLO market cause for concern last week with widening liability spreads threatening to disrupt the new-issue pipeline over the coming weeks. Still, for others, the sharp drop in loan prices created opportunity, with one of last week’s transactions widely rumoured to be a print and sprint. This week should again be eventful with two industry conferences and the anticipated release of the U.S. risk retention rules.

Against this backdrop, U.S. CLO new-issue volume in the year-to-date rose to $101.01 billion by the end of the week, from 187 deals, according to LCD. During the same period a year ago the market had issued $61.42 billion from 127 CLOs. – Staff Reports

For more news, analysis, and data on the leveraged loan market and CLO segment check out or Loan Market Primer.

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Shenkman Capital Management launches first institutional loan mutual fund

shenkman_logoShenkman Capital Management today announced the launch of the Shenkman Floating Rate High Income Fund (SFHIX).

Shenkman said its existing clients were the primary source of capital for the institutional loan mutual fund, which launched with about $160 million in assets.

This is Shenkman’s second branded U.S. mutual fund. The other is the Shenkman Short Duration High Income Fund, which invests in high-yield bonds.

In addition to the new loan mutual fund, Shenkman also manages loan assets in a combination of separate accounts, private funds, and CLOs.

In the CLO market, Shenkman has priced two deals this year: its $552.5 million Adams Mill CLO via Nomura in July, and its $520.6 million Washington Mill deal via Bank of America Merrill Lynch in April. – Kerry Kantin

 

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Leveraged loan fund outflows reach nearly $1B, led by mutual funds, 14th straight week of outflows

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Cash outflows from bank loan funds increased to $946 million during the week ended Oct. 15, according to Lipper. The reading reflects mutual fund outflows of $869 million plus a $76 million outflow from the exchange-traded fund segment.

The latest reading is an uptick from an outflow of $825 million last week and it represents the 25th outflow in the past 27 weeks, for a net redemption of $15 billion over that span.

The trailing four-week average deepens to negative $897 million per week, from negative $807 million last week and negative $686 million two weeks ago. This is the largest average since a negative $944 million reading for the four weeks ended Aug. 24, 2011.

The year-to-date fund-flow reading pushes deeper into negative territory, at roughly $8 billion, based on a net withdrawal of $8.2 billion from mutual funds against a net inflow of $131 million to ETFs. In the comparable year-ago period, inflows totaled $45.9 billion, with 11% tied to ETFs.

The change due to market conditions was negative $829 million, versus total assets of $98.3 billion at the end of the observation period. The ETF segment comprises $7.4 billion of the total, or approximately 8%. – Joy Ferguson

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US leveraged loan funds register outflow for 10th straight week

Cash outflows from bank loan funds grew to $583 million during the week ended Sept. 17, wider than respective outflows of $342 million and $435 million in the previous two weeks, according to Lipper.

The influence of bank-loan ETFs on this week’s number was just 3%, or $16 million. This compares to an outflow of $70 million from ETFs last week.

There now have been 21 weeks of outflows over the past 23 weeks, for a total outflow of $11.4 billion over that span, which follows a record-shattering 95-week inflow streak that totaled $66.7 billion.

The trailing four-week average gaps out slightly to a negative $414 million per week, from negative $404 million last week. This measure remains below the recent peak of negative $858 million from the week ended June 11.

The year-to-date fund-flow reading pushes deeper into negative territory, at $4.4 billion, based on a net withdrawal of $4.9 billion from mutual funds against a net inflow of $442 million to ETFs. In the comparable year-ago period, inflows totaled $43 billion, with 11% tied to ETFs.

The change due to market conditions was a negative $117 million, versus total assets of $103.0 billion at the end of the observation period. The ETF segment comprises $8 billion of the total, or approximately 8%. – Joy Ferguson

 

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Despite CLO boom, structured finance share of leverage loan mart eases

outstandings CLO vs loanIn a year when CLO issuance is booming and retail flows are negative, it’s surprising to note that the share of outstanding institutional loans held by structured-finance vehicles actually has declined, easing to 43.4% (as of Sept. 11), from 44.8% at the end of 2013. By dollar amount, that’s $343.1 billion (according to Wells Fargo CDO analyst David Preston) of the $790.1 billion in the S&P/LSTA Index.

This analysis is part of a longer LCD News story that also details CLO issuance, as a share of LSTA Index leveraged outstandings, structured finance outstandings – CLO 1.0 vs. 2.0 – and near-term possibilities regarding CLOs that will be called.

For more on how the CLO market works check out LCD’s online Loan Market Primer. It’s free, of course.

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Retail reticence: Leveraged loan fund assets see biggest drop since 2011

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The drag on demand from the retail sector in August continues to take its toll. During the month, investors withdrew $3 billion from loan mutual funds that report weekly to Lipper, versus $1.7 billion in July. That figure suggests that when all funds publish their numbers, AUM for the category will fall by $4.3 billion in August – the largest decline since 2011 – after a drop of $2.2 billion in July. – Steve Miller

The chart is part of a loan market technicals analysis, available to LCD News subscribers, that also details

  • change in loan outstandings
  • loan index outstandings
  • high yield bond fund flows
  • leveraged loan yields
  • repricing volume
  • covenant-lite loan issuance
  • CLO issuance

Follow Steve on Twitter.

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Leveraged loans: US CLO volume tops 2013 total as pipelines remain strong

CLO chart 1 2014-09-03(2)

The U.S. CLO market kept on printing new deals through the month of August, helping push this year’s total volume past that recorded for the whole of 2013 and ever closer to the record high of $97.01 billion recorded in 2006.

At $85.42 billion from 158 deals in the year to date, according to LCD, U.S. CLO supply has easily surpassed the $82.61 billion notched from last year and is closing in on the $88.94 billion issued in 2007. – Sarah Husband

For more CLO news and market talk follow Sarah on Twitter: @husbandLCD

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Loan mutual fund outflows ease; ETFs show inflows

Cash outflows from bank-loan funds eased further to $298 million during the week ended Aug. 27, from $540 million in the week ended Aug. 20 and $687 million the week prior, according to Lipper. The influence of bank-loan ETFs on this week’s number was negative 17%, as Lipper recorded a $51 million inflow into ETFs. This compares to a $47 million outflow last week.

There now have been 18 weeks of outflows over the past 20 weeks, for a total outflow of $10.2 billion over that span, which follows a record-shattering 95-week inflow streak that totaled $66.7 billion.

The trailing-four-week average improves slightly to negative $755 million per week, from negative $782 million last week. This measure remains below the recent peak of negative $858 million, from the week ended June 11.

The year-to-date fund-flow reading pushes deeper into negative territory, at $3 billion, based on a net withdrawal of $3.6 million from mutual funds against a net inflow of $509 million to ETFs. In the comparable year-ago period, inflows totaled $39.7 billion, with 11% tied to ETFs.

The change due to market conditions was a positive $143 million, versus total assets of $104.4 billion at the end of the observation period. The ETF segment comprises $7.9 billion of the total, or approximately 8%. – Joy Ferguson

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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.