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US Leveraged Loan Funds See $510M Cash Withdrawal; Outflow Streak Hits 29 Weeks

U.S. leveraged loan funds saw a net outflow of $510 million for the week ended Feb. 10, according to Lipper. This expands upon an outflow of $405 million last week. Moreover, it’s the 29th-consecutive one-week outflow for a combined withdrawal of $15.9 billion over that span.

US leveraged loan fund flows
The net redemption for the sixth week of the year was mostly from mutual funds, with just 23%, or $119 million, linked to the ETF segment. That’s up in recent weeks, however, as the ETF influence was 18% of the outflow last week and 8% of the outflow the week prior.

Amid a modestly larger week-over-week outflow, the trailing-four-week average was fairly steady, at negative $599 million per week, from negative $584 million last week and negative $622 million two weeks ago. Recall that a negative $1.2 billion observation five weeks ago was the deepest reading in roughly a full year, or since a slightly wider negative $1.3 billion reading in the last week of 2014.

Year-to-date outflows from leveraged loan funds are now $3.4 billion, with 11% ETF-related. The full-year 2015 reading closed deeply in the red, at negative $16.4 billion, with likewise approximately 7% tied to ETF redemption.

The change due to market conditions this past week was little moved, at negative $439 million, or just 0.6% against total assets, which were $72.5 billion at the end of the observation period.

Just as with the close of 2015, the ETF segment currently accounts for $5.1 billion of total assets, or roughly 7% of the sum. — Matt Fuller

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

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US Leveraged Loans lose 0.33% today; YTD return is –1.36%

Loans lost 0.33% today after losing 0.06% yesterday, according to the LCD Daily Loan Index.

The S&P/LSTA US Leveraged Loan 100, which tracks the 100 largest loans in the broader Index, lost 0.44% today.

In the year to date, loans overall have lost 1.36%.

This story first appeared on www.lcdcomps.com, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here

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In rare move, Apollo moves Magnetation DIP loan to non-accrual

Apollo Investment moved a DIP loan to iron ore miner Magnetation to non-accrual in the recent quarter, an SEC filing showed.

A $13 million 12% PIK loan to Magnetation was marked at a fair value of $12.3 million as of Sept. 30. However, as of Dec. 31 the fair value of the loan was reduced to $6.6 million, and the loan was classified as non-accrual in the portfolio.

Asked about the investment during an earnings call, CEO Jim Zelter said the situation was “ongoing,” and declined to disclose further details.

Apollo’s investment in Magnetation also included $32.6 million of 11% first-lien debt due 2018, marked with a fair value of $1.8 million as of Dec. 31, versus $6.1 million as of Sept. 30. However, this debt had already been considered non-accrual.

Grand Rapids, Minn.–based Magnetation filed for Chapter 11 in May 2015.

Apollo Investment, a BDC that trades on Nasdaq under the symbol AINV, invests in senior loans, subordinated and mezzanine debt, and equity of middle-market companies. — Abby Latour

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

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Repayments on European Leveraged Loans Hit 3-Year Low

european leveraged loan repayments

Repayments out of the S&P European Leveraged Loan Index (ELLI) fell to just €86 million in January – down from €1.3 billion in December, and the lowest monthly amount in more than three years.

As a result the rolling three-month repayment rate declined to 3.6%, from 7% in the fourth quarter, based on €3.2 billion of loans repaid in the last three months.

The ELLI did not track any full paydowns in the first month of 2016, resulting in a very low repayment tally. – Staff Reports

This story first appeared on www.lcdcomps.com, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here

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US Leveraged Loan Default Rate Creeps to 1.37%, Courtesy Noranda

leveraged loan default rate

The default rate of the S&P/LSTA Leveraged Loan Index inched to 1.37% by principal amount, from 1.33% at the end of January, after Noranda Aluminum filed for Chapter 11 on Feb. 8.

Citing challenging market conditions for the aluminum industry Noranda filed for Chapter 11 in the U.S. Bankruptcy Court for the Eastern District of Missouri.

Though not a large default—there was about $467 million outstanding under Noranda’s TLB as of Sept. 30, SEC filings show—Noranda is the fifth S&P/LSTA Index issuer to default this year, following defaults from The Sports Authority,Verso/NewPage, Arch Coal and RCS Capital in January.

The loan default rate is expected to remain below trend in 2016, before creeping up to the historical average of 3.2% by the end of 2017. Indeed, managers on average say that the loan default rate by amount will climb to 2.35% by year-end 2016 and to 3.24% by year-end 2017, according to LCD’s latest quarterly buyside survey conducted in early December. – Kerry Kantin/Steve Miller

This story first appeared on www.lcdcomps.com, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here

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CLO Sighting: BlackRock Prices €410M Vehicle in European Market Debut

Credit Suisse has priced the €410.238 million CLO for BlackRock Investment Management (UK) Limited, according to market sources. The transaction is the manager’s first European CLO, and is the first to price in Europe in more than three weeks.

The structure has been revised since launch, with the single-B rated tranche removed. Discount margins were not released.

The revised structure runs as follows:

The closing date is Feb. 24, 2016, and the first payment date is Sept. 15, 2016. The legal final maturity is March 15, 2029. During the marketing phase, the non-call period was guided as roughly two years, and the reinvestment period as roughly four years.

For risk retention, the manager intends to retain a 5% vertical slice as sponsor. BlackRock Investment Management (UK) Limited is a MiFID registered entity.

For Volcker, the transaction will rely on Rule 3a-7, while the Class A, B, C, and D notes will also be issued in the form of CM removal and replacement non-voting notes or CM removal and replacement exchangeable non-voting notes, in respect of any CM removal resolution or CM replacement resolution.

This is the first European CLO to price in February, and BlackRock’s transaction takes the year-to-date tally to €0.82 billion from two transactions, according to LCD. — Sarah Husband

Follow Sarah on Twitter for CLO market news and insights.

This story first appeared on www.lcdcomps.com, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.

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Leveraged Loans: Jurisdiction, Credit Risk at Heart of LSTA/SEC CLO Suit

A ruling on the LSTA’s suit against regulators over CLO risk retention may not be reached until just before the regulation is due to go into effect on December 24.

Much will depend on which court has the jurisdiction to hear the suit, a topic that was heavily debated at last Friday’s oral arguments at the D.C. Appeals Court.

If the appeals court has jurisdiction, a ruling could be expected by June or July, but it’s also possible that the case gets transferred to the lower D.C. District Court, pushing any ruling very close to the December 24 deadline.

In that latter scenario, the LSTA would likely try to speed things along, requesting an expedited hearing in addition to negotiating with the government to use the same briefs that were submitted to the appeals court to save time, but nonetheless another date would have to be set in the district court for oral arguments.

Adding to the timeline is the likelihood that the decision in the district court would be appealed regardless. The case would then return to the appeals court where a different panel of judges would ultimately rule on the merits.

The LSTA could also ask for a stay of the final rule from the judge, meaning that the deadline for CLO managers to comply with risk retention would not go into effect until the case is decided in the appeals court.

Friday’s developments mean that any relief for the CLO market around risk retention remains a long shot, but there was at least some encouragement that the justices on Friday seemed open to some of the LSTA’s arguments.

To recap, the LSTA is challenging the Federal Reserve and Securities and Exchange Commission (SEC) on three fronts related to the 5% retention requirement in December.

The LSTA argues that the regulators are misinterpreting the definition of a “securitizer,” not properly defining “credit risk,” and failing to consider potential alternatives such as the Qualified CLO.

If the courts rule that CLO managers are not “securitizers,” CLOs would likely be exempt from risk retention, while a ruling that the regulators failed to either properly define credit risk or consider alternatives would mean regulators may have to re-propose risk retention.

When the lawyer for the Federal Reserve explained the securitization process of CLOs and how the risk is transferred from the balance sheets of the banks to CLO investors, a judge asked, “but you weren’t saying these risky loans were ever on the balance sheet of the manager, right?” To which the Fed’s lawyer replied, “They never put them on their balance sheet your honor, that is correct.”

Thus supporting the LSTA’s argument that the CLO manager is not a “securitizer” because it has no ownership, possession, or control of the underlying loans assets when they are purchased and put into a special purpose vehicle (SPV).

The definition of credit risk was prominently debated in the latter part of the hearing. The LSTA argues that the government is under obligation to explain its rulemaking, and the agencies fail to clearly define credit risk, using only the term “fair value.” And while CLO managers can comply with the 5% risk-retention rule through a vertical slice, horizontal slice, or a mix of both, justices acknowledged their awareness that the horizontal tranche is composed entirely of the “first-loss” piece. Lawyers for the LSTA pointed out that the same 5% held in a vertical slice has a different risk profile because almost 80% (the AAA tranche) has very little credit risk.

While one of the judges appeared sympathetic to the LSTA’s argument on credit risk, another seemed to suggest that the government may have met its burden by proposing the 5% vertical slice.

The audio of Friday’s hearing hearing can be found here.

The case is The Loan Syndications & Trading Association v. SEC, 14-1240, U.S. Court of Appeals, District of Columbia Circuit (Washington). — Andrew Park

Follow Andrew on Twitter for CLO market news and insights. 

This story first appeared on www.lcdcomps.com, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here

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Midstates Petroleum Draws Down $249.2M Remaining on Revolving Loan

Midstates Petroleum today disclosed it has borrowed the remaining $249.2 million available under its revolving credit facility. Proceeds of the facility are earmarked for general corporate purposes.

The aggregate amount outstanding under the credit facility is approximately $252 million, including approximately $2.8 million of outstanding letters of credit. The company’s cash balance, as of Feb. 9, was $335.7 million, according to an SEC filing.

SunTrust Bank is administrative agent.

Midstates in May issued a privately placed $625 million offering of 10% second-lien notes to a small group of investors alongside an uptier exchange of some of its outstanding unsecured notes for partial-PIK third-lien notes. Prior to today’s draw-down disclosure, the second-lien notes due 2020 were pegged in a mid-to-high 20s context.

Midstates Petroleum engages in the exploration, development, and production of oil, natural gas liquids, and natural gas in the United States. It primarily focuses on oilfields in the Mississippian Lime trend in northwestern Oklahoma; the Anadarko Basin in Texas and Oklahoma; and the Upper Gulf Coast Tertiary trend in central Louisiana. The company is rated CCC+/Caa1, with stable outlook on both sides. – Rachelle Kakouris

Follow Rachelle on Twitter for distressed debt news and insight. 

This story first appeared on www.lcdcomps.com, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here

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Sign of the Times: Where do Endownments/Foundations See 2016 Opportunity: Distressed Debt

2016 opportunities

Endowments and foundations generally are pessimistic about the 2016 economic environment, though they do see a few potential bright spots. Chief among them: Distressed debt.

“Investors believe there are opportunities for return in select asset classes for those willing to move quickly and look past short-term noise,” said Cathy Konicki, head of the NEPC’s endowment and foundation practice group. The NEPC is consulting firm that conducting a survey of endowments/foundations, on which the above responses are based. – Staff reports

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Leveraged Loans: Amid Global Volatility, CLO Market Players Stranded on Sidelines

 

global CLO issuance

It’s not getting any better out there for U.S. and European CLO markets, and with liability spreads continuing to gap out each week, some are speaking in terms of the primary market becoming dysfunctional. The stats say it all, with just $1.28 billion pricing globally this year versus $9.24 billion in the same period last year, according to S&P Capital IQ LCD.

Managers are marketing transactions in both regions, but with the ongoing volatility and the need to reduce fees on those investing in the CLO equity portion, few managers are actually able to price a CLO. Those that can are waiting for conditions to improve. Others with warehouses that are well ramped may be under increasing pressure to act.

Unsurprisingly, no transactions priced on either side of the Atlantic last week. – Sarah Husband/Andrew Park

Year-to-date volume:

  • U.S. – $830 million from two deals versus $6.95 billion from 13 deals in the same period last year
  • Europe – €410 million from one deal versus €560 million from one CLO in the same period last year
  • Global – $1.28 billion from three deals versus $9.24 billion from 17 deals in the same period last year

This story first appeared on www.lcdcomps.com, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here

Follow Sarah on Twitter for CLO market news and insights. 

Follow Andrew on Twitter for CLO market news and insights.