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.


Europe: Quirolo joins Cadwalader, Wickersham & Taft as a partner

cadwalader David Quirolo has joined CadwaladerWickersham & Taft as a partner in the Global Capital Markets Practice Group, in the firm’s London office. Quirolo joins from Ashurst, where he was a partner.

His practice focuses primarily on CLOs and other securitization and repackaging transactions involving various asset types, and advises arrangers and collateral managers as well as issuers, managers, originators, and investors in a variety of structured finance transactions, both in the U.S. and Europe.

Prior to joining Ashurst, Quirolo spent eight years in Cadwalader’s New York and London offices. – Sarah Husband


Europe: Hirji joins BlackRock’s Credit Enhanced Strategies team

blackrock_logo_2218Aly Hirji has joined BlackRock’s Credit Enhanced Strategies Europe team, run by Michael Phelps, according to sources.

He joins as portfolio manager, and will be responsible for building out the leveraged loan product and complementing the investment processes for existing funds.

Hirji joins from New Amsterdam Capital, where he was partner and portfolio manager. He joined NAC in 2004 from J.P. Morgan.

As of Dec. 31, 2012, BlackRock’s assets under management totalled $3.792 trillion across equity, fixed income, cash management, alternative investment, real estate, and advisory strategies. – Isabell Witt


Leveraged loan default rate to remain low in months ahead: LCD survey

Managers expect loan defaults to remain scarce in the near future, according to LCD’s latest quarterly buyside survey, taken in early September.

On average, managers predicted that the lagging-12-month default rate of the S&P/LSTA Leveraged Loan Index will end 2014 at 0.78% by amount, versus 0.44% in August. (These figures exclude Energy Future Holdings. Including EFH, they are 3.88% and 3.34%, respectively.) Looking out to September 2015, managers expect the rate to climb to 1.38% (EFH will have fallen from the lagging 12-month rolls by then).

For LCD subscribers, please click here to access the complete story, analysis, and the following charts:

  • Earnings growth of S&P companies
  • Averaged cash-flow coverage of outstanding loans
  • Averaged leverage of large LBOs
  • Average (EBITDA-capex)/cash interest of large LBOs

– Steve Miller

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



Healthcare Finance Group adds two new hires for business development

101036825-2316d510d06283564e6ca6818894d0918faf5db9.530x298Healthcare Finance Group announced two new hires today that expand the specialty finance firm’s business development effort. Andy Phelps and Mark Farlin joined the company as Senior Vice Presidents of Business Development.

Based in San Diego, Calif., Farlin will cover healthcare providers in California and the southwest, including Texas and Oklahoma, and on medical device and other healthcare manufacturers throughout the western U.S., according to the firm. Phelps will be focused on originating transactions directly from healthcare companies and through intermediaries in the southeast. He will be headquartered in Charlotte, N.C.

Farlin joins HFG from Olympus Financial Services and prior experience includes positions at Citicapital’s healthcare division and at GE Healthcare Financial Services. Phelps was previously at PNC Bank and before that he worked at Fifth Third Bank and Wells Fargo (Wachovia).

New York-based HFG is a specialty finance company that provides senior debt financing to middle market healthcare companies with target transaction sizes between $5-500 million. HFG is a portfolio company of publicly traded BDC Fifth Street Finance Corp., which acquired the firm in 2013. – Staff reports


Solar Capital BDC – PIMCO joint venture to focus on unitranche middle-market loans

Solar Capital Partners is seeking to grow in what it sees as one of the few remaining spaces where opportunity abounds since regional banks retrenched after the credit crisis: unitranche lending to middle-market companies. The investment firm, which manages two BDCs, has teamed up with PIMCO in the venture.

This month, the Solar Capital BDC, which trades on Nasdaq under the ticker symbol SLRC, announced the formation of a joint venture with PIMCO to focus on unitranche loans to private equity-owned and entrepreneur-owned middle-market companies, targeting companies across sectors with a steady track record of generating annual EBITDA of $20-50 million.

The unitranche initiative marks the first time Solar Capital will have the scale needed to underwrite and hold entire unitranche loans, adding to the range of products already offered to its private equity clients.

The joint venture will initially comprise equity commitments of $300 million from Solar Capital and $43.25 million from the PIMCO affiliate. The PIMCO affiliate committed an additional $256.75 million of capital to co-invest in unitranche loans alongside the joint venture. With expected eventual leverage of 2x debt-to-equity, the unitranche loan program will have $1.5-1.8 billion of investable capital.

“To be relevant in this space, you need to write a check for $100 million to $200 million. That’s why we sought a joint venture partner,” said Michael Gross, CEO and co-founder of the investment firm.

“This is not the type of leverage that CLOs are using—ours is a conservative up to 2x. So we don’t need to rely on buoyant credit markets,” said Gross. “But the leverage will allow us to scale up and buy bigger pieces of the same loan, and thus become more relevant to the borrower.”

Despite the frothiness in credit markets, middle-market unitranche lending remains attractive, according to Gross. There, leverage levels have remained at 4.5-5.5x, covenants are intact, and capital structures still have a significant equity cushion, Gross said.

“From a borrower’s perspective the market is very attractive. As an investor, it’s time to be incredibly selective,” said Bruce Spohler, Solar Capital’s chief operating officer and co-founder of the investment firm.

Recovery rates for unitranche loans are still untested for the most part, but will likely fall between the recovery levels of mezzanine debt and middle-market bank loans, said Gross.

As of June 30, Solar Capital’s portfolio was valued at $984 million, consisting of 43 portfolio companies and was invested roughly 74% in senior secured loans and Crystal Financial, whose loans are 100% senior secured. Among Solar Capital’s portfolio were loans backingAdams OutdoorWireCoGlobal Tel*Link, and Blue Coat Systems.

In addition to the Solar Capital SLRC BDC, Solar Capital Partners also manages Solar Senior Capital, which trades on Nasdaq under the ticker symbol SUNS. Solar Senior Capital BDC last week unveiled a first-lien loan joint venture with Voya Investment Management.

Solar Senior Capital committed $50 million to the first-lien loan program with Voya Investment Management, while Voya is committing $7.25 million. Management also expects to leverage this vehicle 2x debt-to-equity. Voya Investment Management, an investment advisor for several insurance subsidiaries of NYSE-listed Voya Financial, was formerly known as ING U.S.

As of June 30, Solar Senior Capital’s portfolio was valued at $266 million, consisting of 37 portfolio companies and was invested roughly 97% in senior secured loans and Gemino Senior Secured Healthcare, whose loans are 100% senior secured. Among Solar Senior’s portfolio were loans backing Aegis Toxicology SciencesAsurionConvergeOne, and Genex.

Solar Capital and Solar Senior Capital expect to begin funding investments in their respective joint ventures before year-end.

Unitranche loans, usually from a single lender, offer an interest rate between that of senior loans and subordinated debt. For borrowers, these loans are simpler to manage because they are not from a group of lenders. From the lender’s perspective, unitranche loans could see a larger recovery in the event of a default due to the absence of more senior or junior creditors. – Abby Latour

Follow Abby on Twitter @abbynyhk for middle-market deals, leveraged M&A, distressed debt, private equity, and more


CLO roundup: September gets off to slow start in both US, Europe

It’s been a tentative post-summer return for the CLO market with just three new issue CLOs pricing so far in the U.S. this month, and the Dryden XXVII tap providing Europe’s only new issue activity to date. Still, a number of transactions are expected to price this week, ahead of the IMN’s ABS East Conference in Miami next week (Sept. 21-23).

Global CLO issuance in 2014 stands at $97.71 billion, according to LCD.

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

  • Deal pipeline
  • US arbitrage CLO issuance and institutional loan volume
  • European arbitrage CLO issuance and institutional loan volume

– Sarah Husband