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US Leveraged Loans Returning 0.64% in February, 3.21% YTD

U.S. leveraged loans are following up on their best January since 2009 with a solid February, with the asset classes returning 0.64%, according to the S&P/LSTA Loan Index. Of course, the recent performance follows a dismal December, when loans lost a heart-stopping 2.54% , its worst performance in seven years, amid serious volatility in the equities markets and general unease about the global economic picture.

The loan market has stabilized as retail investors have slowed their retreat from the asset class.

In December, loan mutual funds and ETFs saw roughly $12.2 billion of net withdrawals. That figure lessened to $4.4 billion in January, according to Lipper. While outflows are continuing this month, they’re easing even more. Withdrawals totaled a relatively slim $472 during the week ended Feb. 13, though that was the thirteenth straight outflow for the asset class, per Lipper.

Of note, loan ETFs saw a roughly $246 million inflow last week, the first such movement since early last month.

Another indication of the recent loan market rebound. There’s actual green (denoting a bid for secondary assets) per BAML/Instinct’s leveraged loan market trading platform – Tim Cross

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After record 2018, issuance of US CLOs off to quiet start to year

US CLO issuance

After record issuance in 2018, the market for U.S. collateralized loan obligation vehicles is off to a cautious start, after the broader financial market gyrations of December and January. Through Feb. 8 there has been $6.36 billion of CLO vehicles priced, compared to $11.32 billion during the same period one year, according to LCD.

CLOs are special-purpose vehicles set up to hold and manage pools of leveraged loans. They are a critical component of the U.S. leveraged loan investor base, accounting for some 60% of all loans broadly syndicated to institutions.

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Ditech, in restructuring agreement with loan lenders, files Ch. 11 but still seeks sale

Ditech Holding Corp. on Feb. 11 filed for Chapter 11 in bankruptcy court in Manhattan to implement a restructuring support agreement that the company has entered into with holders of more than 75% of the company’s term loan, the company announced.

According to a news release this morning, “the RSA provides for a restructuring of the company’s debt while the company continues to evaluate strategic alternatives.”

According to the first-day declaration filed in the case by Gerald Lombardo, the company’s CFO, the RSA contemplates that more than $800 million of funded debt would be extinguished, with the term lenders receiving 100% of the reorganized equity in exchange, and the existing term loan restated in the amount of $400 million.

The contemplated reorganization plan does not provide for any recovery for either the company’s second-lien lenders or current equity holders, although trade claim holders, deemed essential to the company’s ongoing operations, would receive a cash distribution “in an amount equaling a certain percentage of their claim, subject to an aggregate cap,” Lombardo said.

The RSA also contemplates “an appropriately sized working capital facility” upon emergence.

According to the Lombardo declaration, the RSA also provides for the possibility of “another liquidity enhancing transaction,” stating that as a “toggle” to such a transaction, the RSA “provides for the continuation of the company’s prepetition marketing process whereby any and all bids for the company or its assets will be evaluated as a precursor to confirmation of any Chapter 11 plan of reorganization.”

According to court filings, the company’s prepetition marketing process, which began in June 2018, generated at least one potential all-company bid that was subsequently withdrawn, and two bids for the sale of certain servicing and reverse assets with subservicing retained by the company. In December 2018, however, the company decided not to pursue a sale transaction, and turned its attention to negotiating a reorganization with term loan lenders.

Specifically, Lombardo explained, in connection with its reorganization plan, the company would seek proposals for three types of deals, namely a sale transaction for all or substantially all of the company’s assets, an asset sale transaction for a portion of the company’s assets, or a master servicing transaction consisting of an agreement with an approved subservicer to service all or substantially all of the company’s mortgage servicing rights.

“Accordingly, upon completion of the marketing process, not only will the reorganization transaction be fully market tested,” Lombardo said, “the debtors will also be in the best position to compare their options against the reorganization transaction before proceeding to confirmation of their Chapter 11 plan of reorganization.”

In terms of a timeline, the company said it would file a proposed reorganization plan and disclosure statement and proposed bidding procedures by Feb. 26, obtain orders approving the disclosure statement and bidding procedures by April 2, begin an auction (if needed) by May 17, begin a reorganization plan confirmation hearing by June 6, and emerge from Chapter 11 by June 16.

Finally, Lombardo said that to address the company’s immediate working capital needs that it has secured commitments for a $1.9 billion warehouse DIP facility to refinance the company’s existing warehouse and services advance facilities.

The commitments include up to $650 million to fund the company’s origination business, up to $1 billion available to the company’s reverse mortgage servicing business, and up to $250 million available to finance advance receivables related to the company’s servicing activities.

Weil, Gotshal & Manges is the company’s legal counsel, Houlihan Lokey its investment banking debt restructuring advisor, and AlixPartners its financial advisor.

Kirkland & Ellis is acting as legal counsel to the term lenders, with FTI Consulting acting as the group’s financial advisor.- Alan Zimmerman

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US Leveraged Loans Returning 2.86% YTD

Daily loan index 2019-02-07

After an epic plunge in December and a wild rebound in January, prices on U.S. leveraged loans in the trading market have climbed 31 bps during the first week of February.

Loans gained 0.04% yesterday after gaining 0.08% on Wednesday, according to the S&P/LSTA Leveraged Loan Index.

The S&P/LSTA US Leveraged Loan 100, which tracks the 100 largest loans in the broader Index, gained 0.06% today.

Loan returns are 2.86% in the YTD.

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After December Hiatus, European CLO Market off to Deliberate Start to 2019

Europe CLO issuance

The market for collateralized loan obligations in Europe has gotten off to slow start this year, with one deal totaling €510 million, according to LCD. The scarce activity comes after a December with no new CLO issuance, and amid wild gyrations in the usually less-volatile global leveraged loan market.

Before December there was some €27.3 billion of CLO issuance in 2018, a record.

CLOs are an essential component of the leveraged loan investor base. Leveraged loans, which are undertaken by riskier borrowers (those rated BB+ and lower), now total the equivalent of some $1.35 trillion in outstandings, according to LCD, rivaling the high yield bond market. In the U.S. roughly 60% of these credit are held by CLOs.

Activity in CLOs could well pick up.

The pipeline should start to deliver some more meaningful supply this month, and leveraged loans backing Ahlsell and Proxiserve already are on offer to early-bird investors, writes LCD’s David Cox.

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US Leveraged Loan Default Rate Slides to 17-Month Low

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The default rate on U.S. leveraged loans slid to 1.42% in January, marking a 17-month low for the asset class, according to LCD.

The rate is down from 1.63% in December and has fallen steadily from the three-year high of 2.42% at the end of 2018’s first quarter. It remains well below the 2.96% historical average.

The dip in the default rate comes despite sustained concern from the broader financial markets that the aging credit cycle, which began after the financial crisis of 2007-08, is approaching an end (though there is no consensus as to when that will be exactly, of course). One thing that all agree on: The widespread acceptance of covenant-lite loan issuance over the past few years – some 80% of leveraged loan debt now outstanding are cov-lite – has enabled or could allow loan issuers that might face problems with mounting debt to skirt potential default issues, for a time, anyway.

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TransDigm makes quick return to US high yield bond market for $750M deal

TransDigm is back in the market with a $550 million offering of eight-year (non-call three) subordinated notes, and a $200 million add-on to the recently priced 6.25% secured notes due 2026, sources said. Pricing for the deal is expected today, Feb. 1.

Joint bookrunners for the secured debt are Morgan Stanley, Credit Suisse, Citi, Barclays, RBC Capital Markets, Credit Agricole, and KKR Capital Markets. Bookrunners for the senior subordinated paper are Morgan Stanley, Credit Suisse, KKR Capital Markets, Citi, Barclays, and RBC Capital Markets. Existing ratings are B+/Ba3 for the secured debt, and B–/B3 for the subordinated notes.

Proceeds of the new subordinated notes are earmarked to redeem the borrower’s $550 million outstanding of 5.5% notes due 2020, according to an offering memorandum. The funds raised from the tack-on secured bonds will support the company’s acquisition of Esterline Technologies.

TransDigm earlier this week placed the initial print of the 6.25% secured notes due 2026 supporting the Esterline buy, as a $3.8 billion transaction. Final terms were set at par. The offering was initially proposed to include $1 billion of senior subordinated notes, which were subsequently removed, with that amount steered to the secured tranche and an additional $100 million tacked on. These notes closed the session on Thursday, Jan. 31, at 101.75, yielding 5.85%, trade data show. Trades recorded this morning show the bonds changed hands at 101.25, for a 5.96% yield.

TransDigm is a designer, producer, and supplier of highly engineered aircraft components. – Jakema Lewis

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Europe CLO Market Kicks Off 2019 with €509M Deal

Europe’s first collateralized loan obligation vehicle of the year priced on Friday. Barclays printed an upsized, €509 million CLO for Credit Suisse Asset Management. The triple-A tranche of debt priced wider than the last anchored deals of 2018. The deal was upsized by roughly €100 million.

Activity in Europe’s CLO new-issue market should continue to pick up considerably, as details of four new deals emerged last week from CELF Advisors, Guggenheim, ICG, and Blackstone/GSO, with the latter also releasing price guidance today.

CLOs are special-purpose vehicles set up to hold and manage pools of leveraged loans.

The special-purpose vehicle is financed with several tranches of debt (typically a ‘AAA’ rated tranche, a ‘AA’ tranche, a ‘BBB’ tranche, and a mezzanine tranche) that have rights to the collateral and payment stream, in descending order. In addition, there is an equity tranche, but the equity tranche usually is not rated.

CLOs are created as arbitrage vehicles that generate equity returns via leverage, by issuing debt 10 to 11 times their equity contribution.

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Free Webinar: Global High Yield Markets Opportunities, Pitfalls in 2019

webinar imageS&P Global Market Intelligence and LCD are excited to present on Tuesday, Jan. 29 a complimentary webinar on the  global high yield market: Opportunities and Pitfalls in 2019.

You can register for the event here.

Topics covered in this webinar include

  • An overview of 2018 U.S. high yield performance
  • Historical perspective on the late 2018/early 2019 downturn
  • Is the distress ratio signaling a recession? How reliable is this predictor?
  • Deal flow in the face of rising credit risk: 2019 outlook in the U.S. and European high yield markets
  • Risks and opportunities in today’s global high yield market
  • Ratings performance
  • Multi-notch downgrades
  • Fallen angel risk
  • Distressed and default outlook

Date
Jan. 29, 2019

Time
10-11 am EST

Speakers

Marty Fridson
CIO
Lehmann, Livian, Fridson Advisors LLC

Diane Vazza
Managing Director, Head of Global Fixed Income Research
S&P Global Ratings

  Nicholas Kraemer, FRM
  Senior Director, Global Fixed Income  Research
S&P Global Ratings

John Atkins
Director, Leveraged Commentary & Data
S&P Global Market Intelligence

Luke Millar
Director
S&P Global Market Intelligence

Ruth Yang
Managing Director, Leveraged Commentary & Data
S&P Global Market Intelligence

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LCD comps is an offering of S&P Global Market Intelligence. LCD’s subscription site offers 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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After Deal-Free December, US High Yield Bond Issuance Takes Off

Following a rare month with no U.S. high yield debt issuance – which exacerbated a broader downturn in U.S. high-yield primary volume over the tail-end of 2018 – speculative-grade bond issuers are moving off the sidelines against a steadier financial-markets backdrop, capitalizing on pent-up investor demand for fresh prints and the resulting improvement in their pricing leverage, LCD data shows.

The week ended Jan. 25 was on track to produce the largest new-issue market weekly volume since early-August 2018, with more than $6 billion in supply slated to clear. The lion’s share—$4.2 billion—was priced in a single session, which saw each transaction upsized, and finalized with an issuer-friendly yield. A strong appetite for new debt helped reverse a wave of price widening recorded for the U.S. arm of the asset class during the final quarter of 2018, which saw buysiders and issuers alike proceed with caution among price slides in equities and crude oil, large outflows from high-yield funds, and increasing trade tensions.

Tenet Healthcare on Jan. 22 raised $1.5 billion of 6.25% secured second-lien notes due 2027 at the tight end of talk, after doubling the size of its deal, and Vistra Energy printed $1.3 billion (up from $700 million) of 5.625% notes due 2027, at the midpoint of circulated guidance. That same day, Albertsons Cos, boosted its pitch by $100 million, selling $600 million of 7.5% notes due 2026, and MGM Growth Properties placed $750 million of 5.75% notes due 2027, after upping the offering size from $500 million. Both transactions cleared at the tight end of guidance.

So far in January, no deals were printed at the wide end of price guidance or outside of the announced talk range, an indicator of healthy market demand. Six of the 10 deals were priced at the firm end of guidance, with the balance printed at the midpoint of talk.  

In contrast, in the fourth quarter, just 38% of the new issues cleared syndicate at the firm end of price talk ranges. Five issues priced at the wide end of talk or outside the announced range, accounting for nearly one-quarter of the total offerings. – Jakema Lewis/John Atkins

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