Leveraged Loan Covenant Restrictions Ease as Market Continues to Strengthen

Amid better technical conditions, leveraged leveraged loan covenant restrictions have loosened in the second quarter. The average free-and-clear tranche of covenant-lite institutional loans, for example, has expanded to a one-year high of 0.69x EBITDA since April 1, from 0.66x in the first quarter.

free and clear tranchesFree-and-clear tranches are tranches that allow companies to issue debt without triggering financial incurrence tests (you can learn more about this type of debt in LCD’s free Primer/Almanac).

Covenant Review observes that many other loan terms—including most-favored-nation protections, restricted payment baskets, and caps on EBITDA adjustments—have also shifted in a more issuer-friendly direction in recent months, though in general documents are still tighter than they were in early 2015, when muscular conditions prevailed.

This development follows similar trends at play in new-issue clearing spreads, secondary loan prices, and the recent reemergence of opportunistic deal flow. Looking ahead, managers expect issuers to continue to leverage today’s strong loan demand to command more favorable covenant treatment.

Covenant Review will introduce in early June a monthly report that puts a lens on benchmark statistics for loan covenants, cutting the data by rating, sector, and sponsor where appropriate. – Steve Miller

Steve is CEO of CR Holdco LLC, and until recently supplied most of the many baseball analogies found in LCD’s leveraged loan analysis.

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Seven Leveraged Loan/High Yield Issuers Join LCD’s Restructuring Watchlist

Seven debt issuers joined LCD’s Restructuring Watchlist last week, bringing the total number of entities on the list to 44.

The Watchlist tracks companies with recent credit defaults or downgrades into junk territory, issuers with debt trading at deeply distressed levels, as well as those that have recently hired restructuring advisors or entered into credit negotiations. It is compiled by LCD’s Matthew Fuller and Rachelle Kakouris.

Joining the Watchlist last week:

  • Communications software concern Avaya , which hired GS and Centerview to address capital structure issues
  • Oil exploration & production co. EXCO Resources, which hired Akin Gump as legal advisor, and said it will retain a financial advisor
  • Halcon Resources, another E&P firm; it inked a restructuring agreement via Chapter 11
  • Luxembourg-based Satellite concern Intelsat, which recently lowered the price on the co.’s bond buyback
  • Internet radio concern iHeartMedia , which is negotiating a debt buyback (and reportedly is hiring advisors)
  • Stone Energy, which skipped a coupon payment
  • Calgary-based oil waste concern Tervita, which deferred an interest payment

distress ratio

It will be no surprise to learn that, of the 44 issuers on the Watchlist, 18 hail from the energy/O&G sectors, with another three in the mining/commodities space. – Tim Cross

The Restructuring Watchlist is published each week in LCD’s Distressed Weekly. You can follow LCD on Twitter or learn more about us here. LCD is an offering of S&P Global Market Intelligence


Versa Media Capital nets $100M financing from Crayhill Capital

Versa Media Capital received a $100 million financing facility from Crayhill Capital Management.

Versa Media Capital is a newly formed company that will provide bridge financing for independent film and television production, as well as mezzanine, gap, and tax credit loans. The team expects to structure and close financing for 15–20 projects per year.

The company was founded by Jeff Geoffray, Jeffrey Konvitz, and Daniel Rainey.

Geoffray co-founded film financing company Blue Rider Finance, which underwrote and financed over 70 transactions on films with over $700 million in production costs. Konvitz is an entertainment attorney. Rainey is a private equity investor and attorney.

New York–based Crayhill Capital Management is an alternative-asset-management firm. — Abby Latour

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


Linn Energy Delisted from NASDAQ; LinnCo Exchange Offer Extended

Linn Energy said yesterday it received notice that it and LinnCo would be delisted from trading on NASDAQ, as of today’s open.

The company said that the two companies are expected to begin trading on the OTC Pink Sheets marketplace today under the symbols LINEQ and LNCOQ, respectively.

Separately, the company also said yesterday it had extended its offer to exchange Linn units for shares in LinnCo, to 12 a.m. EDT on June 30. The terms of the exchange have not changed.

As reported, the exchange offer’s purpose is to permit holders of Linn units to maintain their economic interest in Linn through LinnCo, an entity that is taxed as a corporation, rather than a partnership, which may allow Linn unitholders to avoid future allocations of taxable income and loss, including cancellation of debt income that could result from the Chapter 11.

Roughly 12.07 million shares have been exchanged so far, representing about 69% of Linn Energy’s outstanding units, the company said. — Alan Zimmerman

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Ares Capital grows even bigger with $3.4B American Capital purchase

Two of the largest listed BDCs are merging to form a middle market lending behemoth that will have $13 billion in investments (at fair value). The largest, Ares Capital (ticker: ARCC), announced yesterday that it’s buying American Capital (ticker: ACAS) for $3.4 billion.

The purchase will put even more miles between ARCC and its nearest competitor, now Prospect Capital (ticker: PSEC), which has $6.2 billion in assets against ARCC’s $9.3 billion. The ACAS portfolio will give ARCC another $4.7 billion in investments and expand the number of portfolio companies to 385 from 220.

With the purchase, ARCC will gain scale and flexibility to underwrite larger commitments to compete against traditional banks. Last year’s financing for American Seafoods Group whetted ARCC’s appetite for bigger names. After all, bigger deals generate bigger underwriting and distribution fees. ARCC underwrote an $800 million loan for American Seafoods, snagging a mandate that typically would’ve gone to large banks.

ARCC management yesterday said that it wants the ability to extend commitments of $500 million to $1 billion for any one transaction, with the aim of holding $250 million, whereas before ARCC would go as large as $300 million, with the aim of holding $100 million.

The ACAS purchase also will give ARCC more breathing room under its 30% non-qualifying bucket to ramp its new joint-venture fund with Varagon. The Varagon platform is replacing ARCC’s joint-venture with GE Capital, which began to wind down last year in the wake of GE Capital asset sales.

The boards of directors of both companies have unanimously approved the acquisition.

The purchase requires shareholder approvals and is contingent on the $562 million sale of ACAS’s mortgage unit to American Capital Agency (ticker: AGNC) in a separate transaction.

Elliott Management, holder of a 14.4% interest in American Capital, strongly supports the transactions and will vote its shares in favor.

Ares Management agreed to an income-based fee waiver of up to $100 million for the first ten quarters after closing.

The combined company will remain externally managed by Ares Capital Management LLC, and all current Ares Capital officers and directors will remain in their current roles.

ACAS will continue with planned asset sales ahead of closing, in collaboration with Ares. ACAS hired Goldman Sachs and Credit Suisse in January to vet buyers. Since March 31, ACAS has announced sales of over $550 million in balance sheet investments. In addition to the mortgage business, ACAS is looking to sell its European Capital assets. — Kelly Thompson/Jon Hemingway


US Leveraged Loans Gain 0.07% Today; YTD Return: 4.16%

Loans gained 0.07% today after gaining 0.07% on Friday, 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, gained 0.12% today.

In the year to date, loans overall have gained 4.16%.

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With Market Frowning on Risk, Issuers and Sponsors Privately Place 2nd-Lien Leveraged Loans

privately placed loans

The issuance of second-lien credits in the U.S. syndicated loan market has dropped off dramatically over the past year as economic volatility has sent prices in the secondary sharply higher and often stalled activity in the primary market, especially for riskier transactions (like second-liens).

That’s not to say 2nd-liens have disappeared. Indeed, so far in 2016 LCD has reported on more $2.6 billion of second-lien loans that have been privately placed, in many cases by sponsors seeking junior debt, reaching out directly to buyside firms. This is up from roughly $1 billion during the same period in 2015.

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This story is part of more detailed analysis, by LCD’s Kerry Kantin, first appearing on, 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.


Senate hearing opens discussion on BDC regulation changes

A hearing by the Senate banking committee showed bi-partisan agreement for BDCs as a driver of growth for smaller U.S. companies, but exposed some rifts over whether financial companies should benefit from easier regulation.

BDCs are seeking to reform laws, including allowing more leverage of a 2:1 debt-to-equity ratio, up from the current 1:1 limit. They say the increase would be modest compared to existing levels for other lenders, which can reach 15:1 for banks, and the low-20x ratio for hedge funds.

A handful of BDCs are seeking to raise investment limits in financial companies. They argue that the current regulatory framework, dating from the 1980s when Congress created BDCs, fails to reflect the transformation of the U.S. economy, away from manufacturing.

BDCs stress that they are not seeking any government or taxpayer support.

They are also seeking to ease SEC filing requirements, a change that would streamline offering and registration rules, but not diminish investor protections.

Ares Management President Michael Arougheti told the committee members in a hearing on May 19 that although BDCs vary by scope, they largely agree that regulation is outdated and holding back the industry from more lending from a sector of the U.S. economy responsible for much job creation.

“While the BDC industry has been thriving, we are not capitalized well enough to meet the needs of middle market borrowers that we serve. We could grow more to meet these needs,” Arougheti said.

In response to criticism about expansion of investment to financial services companies, the issue of the 30% limit requires further discussion, Arougheti said.

The legislation under discussion is the result of lengthy bi-partisan collaboration and reflects concern about increased financial services investments, resulting in a prohibition on certain investments, including private equity funds, hedge funds and CLOs, Arougheti added.

“There are many financial services companies that have mandates that are consistent with the policy mandates of a BDC,” Arougheti added.

Senator Elizabeth Warren (D-MA) raised the issue of high management fees of BDCs even in the face of poor shareholder returns. Several BDCs have indeed moved to cut fees in order to better align interests of shareholders and BDC management companies.

She said that Ares’ management and incentive fees have soared, at over 35% annually over the past decade, outpacing shareholder returns of 5%, driving institutional investors away from the sector, and leaving behind vulnerable mom-and-pop retail investors. Arougheti countered by saying reinvestment of dividends needed to be taken into account when calculating returns, and said institutional investors account for 50–60% of shareholders.

Warren said raising the limit of financial services investment to 50%, from 30%, diverts money away from small businesses that need it, while BDCs still reap the tax break used to incentivize small business investment.

“A lot of BDCs focus on small business investments and fill a hole in the market. A lot of companies in Massachusetts and across the country get investment money from BDCs,” said Warren.

“If you really want to have more money to invest, why don’t you lower your high fees and offer better returns to your investors? Then you get more money, and you can go invest it in small businesses,” Warren said.

Brett Palmer, President of the Small Business Investor Alliance (SBIA), said the May 19 hearing, the first major legislative action on BDCs in the Senate, was a step toward a bill that could lead to a new law.

“There is broad agreement that BDCs are filling a critical gap in helping middle market and lower middle market companies grow. There is a road map for getting a BDC bill across the finish line, if not this year, then next,” Palmer said, stressing the goal was this year.

Technically, the hearing record is still open. The Senate banking subcommittee for securities and investment could return with further questions to any of the witnesses. Then, senators can decide what the next stop will be, ranging from no action to introduction of a bill.

Pat Toomey (R-PA) brought up the example of Pittsburgh Glass Works, a company that has benefited from a BDC against a backdrop that has seen banks pulling back from lending to smaller companies following the financial crisis, resulting in a declining number of small businesses from 2009 to 2014.

The windshield manufacturer, a portfolio company of Kohlberg & Co., received $410 million in financing, of which $181 million came from Franklin Square BDCs.

“Business development companies have stepped in to fill that void,” Toomey told the committee hearing. “For Pittsburgh Glass, it was the best financing option available to them.”

FS Investment Corp.’s investment portfolio showed a $68 million L+912 (1% floor) first-lien loan due 2021 as of March 31, an SEC filing showed.

Arougheti cited the example of OTG Management, a borrower of Ares Capital. OTG Management won a contract to build out and operate food and beverage concessions at JetBlue’s terminal at New York airport JFK, but was unable to borrow from traditional senior debt lenders or private equity firms due to its limited operating history.

Ares Capital’s investment in OTG Management included a $24.7 million L+725 first-lien loan due 2017 as of March 31, an SEC filing showed. — Abby Latour

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


After 2 Weeks of Inflows, US Leveraged Loan Funds See $139M Cash Withdrawal

U.S. leveraged loan funds recorded a net outflow of $139 million in the week ended May 18, according to Lipper. This is the first outflow after two weeks of moderate inflows totaling $387 million.

Take note, however, that today’s reading was all mutual funds, at negative $147 million, filled back in barely by an $8 million inflow to ETFs. In contrast, last week’s inflow of $303 million was almost all ETF-related, at 85% of the total.

loan fund flowsThe trailing-four-week average is fairly steady, at positive $43 million, from positive $55 million last week and negative $39 million two weeks ago.

Year-to-date outflows from leveraged loan fund are now $5.1 billion, with an inverse of negative $5.3 billion mutual fund against positive $189 million ETF. A year ago at this juncture, it was similarly mostly mutual fund outflows, at $3.1 billion, versus a small inflow of $82 million to ETFs, for a net negative reading of approximately $3 billion.

The change due to market conditions this past week was essentially nil, at positive $92 million against total assets, which were $61.1 billion at the end of the observation period. ETFs represented about 10% of the total, at $5.9 billion. — Matt Fuller

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

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As Prices Rise in Trading Mart, US Leveraged Loan Fund Assets Grow for 2nd Straight Month

loan fund assets under management

Loan mutual funds’ assets under management continued to grow in April after expanding in March, increasing by $1.44 billion, to $111 billion.

As was the case in March, however, the driver behind the increase wasn’t a surge of demand for the asset class from retail investors, but rather a rally in the secondary loan market.

In fact, funds that report weekly to Lipper FMI actually posted a modest $503 million net outflow for the four weeks ended April 27, which was handily cancelled out by gains in the secondary, according to LCD, an offering of S&P Global Market Intelligence. – Kerry Kantin

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This story first appeared on, 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.