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Loan outflows continue for fifth week, led again by mutual funds

Loan funds reported outflows of $365 million for the week ended July 1, more than double the $174 million of outflows for the week ended June 24, according to Lipper. It was the fifth straight week of outflows for a combined $1.2 billion, which follows a stretch of three consecutive weeks of inflows that totaled $442 million.

Mutual funds again provided the majority of the latest outflow, at $271 million, compared to $93 million of ETF outflows. Last week, mutual funds reported outflows of $151 million, joined by $23 million in ETF outflows.

With today’s outflow, the trailing four-week average widens to negative $268 million, from negative $201 million last week, and negative $147 million two weeks ago.

The year-to-date outflow is $4.1 billion, with 4% tied to ETFs, versus an inflow of $1.2 billion at this point last year, with positive 70% tied to ETFs.

In today’s report, the change due to market conditions was $98 million, or roughly 0.11% against total assets, which were $93 billion at the end of the observation period. The ETF segment comprises $6.7 billion of the total, or approximately 7% of the sum. – Joy Ferguson

Loan Fund Flows July 6 2015

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CLO roundup: Greek cloud hangs over Europe; US prints eight deals

Having already paused activity last week, Greece’s debt problems now threaten to curtail new-issue CLO activity for the rest of the summer in Europe after yesterday’s rejection of austerity measures. It also remains to be seen whether the U.S. market will lose its momentum after last week’s bonanza that saw eight deals print stateside.

Global CLO volume Jul 3 2015

 

Year-to-date statistics are as follows:

• Global issuance totals $68.38 billion.
• U.S. issuance totals $59.96 billion from 113 deals, versus $64.01 billion from 119 deals during the same period last year.
• European issuance totals €7.56 billion from 19 deals, versus €6.92 billion from 16 deals during the same period last year.  – Sarah Husband

 

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High yield bond, loan markets in Europe largely resilient to Greek ‘No’ vote

Despite a resounding ‘No’ vote in the Greek referendum, which saw the country’s people vote against further austerity, the reaction in European loan and bond markets has largely been orderly and contained. The vote has however ushered in a further period of political uncertainty and economic volatility in Europe, with issuers having to wait and see how the situation develops before coming to market with new deals.

In the aftermath of the vote, Greek finance minister Yanis Varoufakis resigned. His replacement will be instrumental in the talks that will now ensue as Greece grapples with how to maintain liquidity in its banking system, and the EU ponders how to prevent (or in a worst-case scenario, manage) the country’s exit from the euro. There is much at stake, with concerns that despite stringent capital controls instigated last week, ATMs across the country may soon run out of cash.

The market’s reaction today was more muted than a week ago when the referendum was announced, with the iTraxx crossover widening by 15 points this morning to 342, and the FTSE 100 and Eurostoxx 50 shedding roughly 42 points and 58 points, respectively. “The market doesn’t seem to care. It’s less of an event than last Monday, after Tspiras called for the referendum. Even euro/dollar is not doing much,” said one investor.

The sovereign bond market followed suit, with 10-year yields on government paper from Italy, Spain, and Portugal widening by 11-14 bps. Greek 10-year bonds widened by 257 bps. Meanwhile the 10-year Bund yield tightened by five basis points, to 74.

High-yield corporates slipped 0.5-2 points across the board in early trading, while Greek-related names were more heavily hit.PPC’s 4.75% notes due 2017 were the biggest losers, down nine points, while Hellenic Petroleum’s 8% notes due 2017 fell seven points. OTE bonds, often a proxy for sovereign risk during a crisis, were also hit – the borrower’s 7.875% notes due 2018 fell six points, while its 3.5% notes due 2020 fell five points.

Loan markets have also been hampered by the volatility, and are likely to remain moribund as issuers wait to see how the Greek situation plays out. “We’ll be gazing at our navels for the next few weeks,” said one arranger. “We can’t post on pricing. There is a market, but we don’t know where it is. The market’s not closed, because there are buyers – there just aren’t any sellers. Why would anybody issue in this market?”

There are investors out there with cash, and there are also several deals ready to launch, the largest of which is the LBO financing for glass-bottle business Verallia, which is expected to total roughly €2 billion of loans and bonds. The transaction, led by BNP Paribas, Credit Suisse, Deutsche Bank, Nomura, Société Générale CIB, and UBS, was understood to be ready to launch if the Greeks had voted ‘Yes’ in the referendum, and the arrangers could still look to de-risk via an early bird phase among select lenders, rather than be on risk for the entire financing over what could be a volatile summer.

The lack of visibility may also affect the launch of expected deals from GFKL Financial Services and Motor Fuel Group, which sources say has been shown to investors already.

In bonds, DufrySynlabs, and Center Parcs remain in the pipeline, while pre-marketing took place for a small U.K. company last week, sources said.

In the CLO market, hopes that a ‘Yes’ vote would offer a window of opportunity for those looking to price transactions ahead of the summer lull were dashed by the results of yesterday’s poll, and arrangers and investors are now busy collating investor feedback, and assessing appetite and likely price levels. However, the ‘No’ vote means new-issue activity could now be on hold until September. Carlyle via Citi, and Pramerica via Credit Suisse were among those looking to price imminently, with another handful behind them, sources say.

As reported last week, this situation may or may not be a problem for CLO managers with warehouses open – depending on the make-up of that warehouse and the future direction of the secondary market. Any significant sell off in secondary in the coming weeks raises the potential for warehouses to go underwater, but a warehouse comprising mostly primary assets bought at par or a discount will be better able to withstand secondary weakness than one constructed via secondary market purchases at par and above. Indeed for those starting to ramp new transactions, the current conditions – a mix of better M&A loan supply, a halt in repricings and spread compression, and volatility – may be ideal in terms of generating a strong equity performance. – Staff reports

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Energy sector, Colt Defense focus of LCD’s Restructuring Watchlist

The beleaguered energy sector dominated activity this quarter on LCD’s Restructuring Watchlist, with Sabine Oil & Gas missing an interest payment on a bond and Hercules Offshore striking a deal with bondholders for a prepackaged bankruptcy.

Another high-profile bankruptcy this month was the Chapter 11 filing of gunmaker Colt Defense. Colt’s sponsor, Sciens Capital Management, agreed to act as a stalking-horse bidder in a proposed Section 363 asset sale. The bid comprises Sciens’ assumption of a $72.9 million term loan, a $35 million senior secured loan, and a $20 million DIP, and other liabilities.

The missed bond interest payment for Sabine Oil & Gas was due to holders of $578 million left outstanding of Forest Oil 7.25% notes due 2019, assumed through a merger of the two companies late last year.

The skipped payment comes after a host of other problems. Sabine Oil has already been determined to have committed a “failure to pay” event by the International Swaps and Derivatives Association, and will head to a credit-default-swap auction. The determination by ISDA is related to previously skipped interest on a $700 million second-lien term loan due 2018 (L+750, 1.25% LIBOR floor).

Meantime, Hercules Offshore on June 17 announced it entered a restructuring agreement with a steering group of bondholders over a Chapter 11 reorganization. The agreement was with holders of roughly 67% of its10.25% notes due 2019; the 8.75% notes due 2021; the 7.5% notes due 2021; and the 6.75% notes due 2022, which total $1.2 billion.

Among other developments for energy companies, Saratoga Resources filed for Chapter 11 for a second time, blaming challenges in field operations, the decline in oil and gas prices, and an unexpected arbitration award against the company. Thus, Saratoga Resources has been removed from the list. Another company previously on the Watchlist, American Eagle Energy, has been removed following a Chapter 11 filing in May.

Another energy company, American Energy-Woodford, could work itself off the Watchlist through a refinancing. On June 8, the company said 96% of holders of a $350 million issue of 9% notes due 2022, the company’s sole bond issue, have accepted an offer to swap into new PIK notes.

Also, eyes are on Walter Energy. The company opted to use a 30-day grace period under 9.875% notes due 2020 for an interest payment due on June 15.

Another energy company removed from the Watchlist was Connacher Oil and Gas. The Canadian oil sands company completed a restructuring in May under which bondholders received equity. The restructuring included an exchange of C$1 billion of debt for common shares, including interest. A first-lien term loan agreement from May 2014 was amended to allow for loans of $24.8 million to replace an existing revolver. A first-lien L+600 (1% floor) term loan, dating from May 2014, was left in place. Credit Suisse is administrative agent.

Away from the energy sector, troubles deepened for rare-earths miner Molycorp. The company skipped a $32.5 million interest payment owed to bondholders on a $650 million issue of first-lien notes. Restructuring negotiations are ongoing as the company uses a 30-day grace period to potentially make the payment.

In other news, Standard & Poor’s downgraded the Tunica-Biloxi Gaming Authority to D, from CCC, following a skipped interest payment on $150 million of 9% notes due 2015. Roughly $7 million was due to bondholders on May 15, and the notes were also cut to D, from CCC with a negative outlook. The company operates the Paragon Casino in Louisiana.

Constituents occasionally escape the Watchlist due to improving operational trends. Bonds backing J. C. Penney advanced in May after the retailer reported better-than-expected quarterly earnings and improved sales.

In another positive development, debt backing play and music franchise Gymboree advanced after the retailer reported steady first-quarter sales and earnings that beat forecasts. Similarly, debt backing Rue 21 gained in May after the teen-fashion retailer privately reported financial results, according to sources. – Abby Latour

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

Here is the full Watchlist, which is updated weekly by LCD (Watchlist is compiled by Matthew Fuller):

Watchlist 2Q June 2015

 

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S&P ratings emerge on $16.1B of debt for Heinz, Kraft tie-up

More details have emerged regarding the debt financing backing H.J. Heinz’s merger with Kraft Foods Group, via an S&P Ratings report.

Heinz’s proposed $15.6 billion debt financing will include $11 billion of senior unsecured notes denominated in U.S. dollars, euros, and pounds; a $4 billion senior unsecured revolver due 2020; and a $600 million term loan due 2022, according to the report. Kraft Canada’s proposed debt, meanwhile, will include C$500 million of senior unsecured fixed-rate notes due 2020.

S&P yesterday afternoon assigned an issue rating of BBB- to Heinz and Kraft Canada’s proposed debt and said it expects to assign a BBB- corporate credit rating to the combined Kraft Heinz Co. following the close of the transaction. Heinz’s existing BB- corporate rating, though, remains on CreditWatch, with positive implications. Kraft’s BBB corporate credit rating also remains on CreditWatch, with negative implications.

Long-dated bonds backing Kraft Foods Group (Nasdaq: KRFT) – which are expected to garner low triple-B consolidated ratings for The Kraft Heinz Co. after the resolution of ratings reviews, versus KRFT’s current BBB/Baa2 profile – traded today wider net of June. KRFT 5% bonds due June 2042, which date to issuance in May 2012 at T+230, traded today at date-adjusted levels near T+220, or 15-20 bps wider since trades early this month, and 40 bps wider over the last two months, trade data show.

Proceeds from the proposed debt financing will be used to refinance Heinz’s $6.4 billion B institutional term loan due 2020, redeem $3.1 billion of Heinz’s 4.25% second-lien senior secured notes due 2020 and $800 million of its 4.875% second-lien senior secured notes due 2025, and redeem Kraft’s recent $1.4 billion June 2015 maturities that were repaid with its revolver.

Heinz’s institutional term loan and 4.25% notes date back to the $28 billion LBO of Heinz by 3G Capital and Berkshire Hathaway in 2013.

Consideration to Kraft shareholders, which will hold a 49% stake in the combined company versus 51% to Heinz shareholders, includes stock in the combined company and a $16.50-per-share special dividend amounting to roughly $10 billion, or 27% of Kraft’s closing price yesterday. The dividend will be funded by an equity contribution by Berkshire Hathaway and 3G Capital. –Richard Kellerhals/John Atkins

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Sabine Oil skips interest payment on acquired Forest Oil bonds after loan default

Sabine Oil & Gas yesterday did not make the coupon payment due to holders of the $578 million left outstanding of Forest Oil 7.25% notes due 2019 that were assumed via the merger of the two companies late last year. Instead of making the approximately $21 million payment, the company will enter a typical 30-day grace period amid “continuing discussions with its creditors and their respective professionals,” according to a statement.

As previously announced, Sabine retained financial advisor Lazard and legal advisor Kirkland & Ellis to address strategic alternatives related to its capital structure. Cash on hand is approximately $277 million, which provides liquidity to fund operations, filings show.

The bonds changed hands yesterday at 21.5, which was fairly rangebound as compared to recent prints, trade data show. Other Sabine issues trade a bit lower, such as the 9.75% notes due 2017, which changed hands in blocks at 15.5, data show.

Sabine Oil has already been determined to have committed a “failure to pay” event by the International Swaps and Derivatives Association, and will head to a credit-default-swap auction. The determination by ISDA is related to previously skipped interest on a $700 million second-lien term loan due 2018 (L+750, 1.25% LIBOR floor).

Recall Sabine entered into a 30-day grace period after skipping a $15.313 million interest payment due to its second-lien lenders on April 21. Since that time, the issuer late last month inked a forbearance agreement to the end of June, barring any defaults under the forbearance agreement or if any other creditor accelerates payment (see “Sabine nets forbearance agreement to 2L TL as grace period ends,” LCD News, May 22, 2015).

In light of the missed interest payment, S&P in April cut Sabine’s corporate and debt ratings to D, triggering a default in the S&P LSTA Leveraged Loan Index. At the time, it was the third Index issuer to default this year after Walter Energy’s downgrade to D after skipping April 15 bond coupons and Caesars Entertainment Operating Company‘s bankruptcy in January, but since Sabine’s default, Patriot Coal last month became the fourth Index issuer to default following its Chapter 11 filing.

Wilmington Trust has replaced Bank of America Merrill Lynch as administrative agent on the second-lien loan, according to a June 1 filing.

Note the company in May also inked a forbearance agreement with lenders to its reserve-based revolver that also runs to June 30.

As of May 8, the company had a cash balance of approximately $276.9 million, which it said provides substantial liquidity to fund its current operations. – Staff Reports

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Colt Defense files Chapter 11; sponsor Sciens to purchase assets

Colt Defense today filed for Chapter 11 in Wilmington, Del., the company announced, saying that the filing would “allow for an accelerated sale of Colt’s business operations in the U.S. and Canada.”

Colt said its current sponsor, Sciens Capital Management, has agreed to act as a stalking horse bidder in the proposed asset sale. Details of the deal were not provided.

The company did say, however, that it would be soliciting competing bids and that it has appointed an independent committee of its board of managers to manage the process and evaluate bids.

Colt’s existing secured lenders have also agreed to provide a $20 million DIP facility to allow for continuation of operations during the Chapter 11 process, which the company said it expects to complete in 60-90 days.

As reported, since April Colt had been seeking consents from its noteholders for an uptier exchange offer or, alternatively, approvals for a proposed prepackaged reorganization plan implementing the exchange. Despite several extensions to the proposed exchange/prepackaged plan, however, the company fell far short of the participation threshold, and allowed the offer to expire on June 12.

O’Melveny & Myers LLP is the company’s legal counsel, and Perella Weinberg Partners is acting as financial advisor. Mackinac Partners is the company’s restructuring advisor. – Alan Zimmerman

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Antares Capital to expand junior debt offering under new owner

Antares Capital will expand its product offering in subordinated, or junior debt under new ownership by the Canada Pension Plan Investment Board (CPPIB).

Antares Capital expects to underwrite, and potentially hold, second-lien and mezzanine debt as a result of the new partnership, according to David Brackett and John Martin, who will lead the group under its new owner. Historically, GE Capital and GE Antares had almost focused entirely on senior secure loans.

After weeks of speculation over who would buy the business, GE today announced plans to sell Antares Capital to CPPIB as part of a $12 billion transaction. Speculation had focused on a non-bank lender as the buyer of pieces of the GE Capital assets up for sale, including of a company trying to enter middle market lending.

In buying the GE business, CPPIB makes a debut in the U.S. middle market business with a splash. GE Capital has long reigned as the dominant player in the middle market lending, defined by LCD as lending to companies that generate EBITDA of $50 million or less, or $350 million or less by deal size, although definitions vary among lenders.

Until now, CPPIB’s focus had been on larger deals. Its junior debt business included high-yield bonds and mezzanine debt. Since 2009, CPPIB’s credit investments have totaled $17 billion, through primary and secondary market purchases. CPPIB’s credit investments are managed by a team of 36 globally.

CPPIB will retain Antares’ team. Antares employs around 300, led by managing partners Brackett and Martin, who have led Antares since its formation. Antares will operate as an independent, stand-alone company.

Moreover, Antares will strengthen its unitranche loan product via the new partnership.

“CPPIB Credit Investments will stand ready to immediately invest follow-on capital into Antares post-closing to support origination of unitranche loans for its clients at scale, as we believe this is a differentiated product that will support Antares’ market leading position,” CPPIB said in a statement today.

Any impact on middle market lending overall as a result of GE Capital’s exit is likely to be minimal.

“There truly isn’t going to be any void. Whatever we’ve been able to provide in the past is what we’ll be able to provide in the future,” said Martin in an interview with LCD News.

The Antares purchase will open CPPIB’s credit investment portfolio to the U.S. middle market. GE Antares specializes in middle market lending to private-equity-backed transactions.

“They had been studying the market for some time and liked the risk-reward scenario. This gave them an opportunity to enter the market in a meaningful way, with scale,” said Brackett in the interview.

The geographic footprint of Antares will likely remain much as it is today, with its headquarters in Chicago, a significant presence in New York, and operations near Atlanta. Antares Capital will operate as an independent business, and retain the name.

The sale is expected to close in the third quarter.

The Senior Secured Loan Program (SSLP), so far not part of the sale, will continue to operate for a time prior to the closing of the deal, giving “Ares and CPPIB the opportunity to work together on a go-forward basis.” The SSLP is a joint venture between GE Capital and Ares Capital. Without an agreement, the program may be wound down (see GE’s sale to CPPIB leaves fate uncertain for $9.6B SSLP partnership).

A similar strategy holds for the Middle Market Growth Program (MMGP), which is a joint venture between affiliates of GE Capital and affiliates of Lone Star Funds, GE said. That program accounts for $600 million of GE Capital investment.

GE announced in April it would divest GE Capital, including its $16 billion sponsor finance business and focus on its core industrial businesses. – Abby Latour

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

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Murray debt slips after appeals court dismisses block of EPA rule

Murray Energy 11.25% second-lien notes due 2021 have traded down four points today on news that a federal court has dismissed an appeal by the coal credit and a dozen states to block a proposed Environmental Protection Agency rule that would limit carbon dioxide emissions from existing power plants. Block trades were reported this morning at 89, versus 90.5 late yesterday and 93 going out last week, trade data show.

In the loan market, Murray’s B-2 term loan due 2020 (L+650, 1% LIBOR floor) was quoted at 94/95 this morning, which compares with 95/95.75 at the beginning of the week, according to sources. The $1.7 billion loan was issued in April at 97 alongside the $1.3 billion bond deal, proceeds of which helped support a purchase of a stake in rival Foresight Energy.

Murray Energy, along with the states of West Virginia, Alabama, Indiana, Kansas, Kentucky, Louisiana, Nebraska, Ohio, Oklahoma, South Carolina, South Dakota and Wyoming, argued that the Clean Air Act does not authorize the EPA to limit such emissions, and it sought to enjoin the EPA from issuing a final rule on the matter, according to court documents. But the EPA has so far only published a proposed rule, and the appellate court ruled that it had no authority to issue a ruling on the legality of a proposed rule, saying it is only authorized to review “final agency rules.”

Proposed rules are published by the government for the purpose of, among other things, obtaining public comment prior to final issuance. According to the Court of Appeals decision, the EPA has received more than two million comments on the proposed rule, and intends to issue a final rule this summer.

Yesterday’s ruling, however, is likely not the final word on the matter. The Court of Appeals ruling does not address the merits of the argument made by Murray and the states with respect to the legality of the rule under the Clean Air Act, and the final rule will presumably be subject to further legal challenge.

Murray Energy placed the $1.3 billion issue of 11.25% second-lien notes in April at 96.86, to yield 12%, after multiple revisions to covenants, size, structure, and price talk. Bookrunners on the B-/B3 deal were Deutsche Bank and Goldman Sachs, and terms were eventually finalized at the midpoint of re-launch talk. Proceeds, along with a coordinated loan effort, support the planned acquisition of a stake in Foresight Energy.

Changes were also made to the concurrent loan (see “Murray Energy sets revised TLs; revises Foresight Energy purchase,” LCD News, April 7, 2015). – Staff reports

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