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July 2014 European Leveraged Loan Market Analysis – Video, Slides

This is S&P Capital IQ’s monthly loan market update. In this post, we concentrate on the trends at work in the European leveraged loan market during 2014 so far, including an increase in M&A financing and some signs of heating in the market. We’ll also touch on the question of whether some slowdown is to be expected.

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Out of the €45 billion of leveraged loan issuance so far this year, M&A-related deals contributed €25 billion, more than double what was raised in the first half of last year. This total was boosted by some jumbo corporate M&A deals, most recently  the cross-border financing for Jacobs Douwe Egberts. Among sponsor-backed buyouts, LCD tracked an increase in the number of asset sales by corporates and families, bringing some welcome debut borrowers to the loan market.

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Institutional investors continued to show strong appetite for leveraged loans during the second-quarter, and heavy repayments on existing loans spurred them on. In fact repayments reached a record quarterly high of €16.6 billion, based on the S&P European Leveraged Loan Index, as the chart shows.

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Adding to institutional demand, there was lively issuance of new-generation CLOs, particularly during June, including some new managers entering the 2.0 market, and sources say the pipeline for further CLO issuance in the second half of the year looks healthy.

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Through much of the year so far, there has been relatively little complaint from buyside firms about leverage multiples, and indeed first-lien leverage is pretty much flat on last year at around 3.7 times EBITDA. But second-lien tranches are appearing more frequently, and this helped drive total leverage a little higher, to 4.9x. Some arrangers argue leverage is unlikely to spiral up and up because this would result in deals coming to market with low single-B ratings, these often being hard to shift in syndication.

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Instead, the market is showing its aggression in other ways – particularly in the use of covenant-lite loans. €10 billion of cov-lite paper – a record – has been raised this year, meaning that roughly one in three euros sold to fund managers had no maintenance covenants. The ELLI Index now includes a 13% cov-lite portion, the highest in its history – although a long long way behind the U.S., where the trend started.

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However, from the point of view of yields, Europe looks less aggressive than it did earlier in the year as this chart suggests. Behind the scenes, yields on domestic European deals were flat from the first quarter to the second. But in line with the weaker technical picture in the U.S. market, cross-border yields widened in recent months, dragging the average out too.

Looking ahead, some kind of summer slowdown is likely, but arrangers say they are pitching on some aggressively structured deals and will be looking out for signs of pushback among investors if terms get too heated.

 

The video is available here.

The URL for the video:

PDF slides of the video on Slideshare is available here.

URL for the slides:

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– Ruth McGavin

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CLO roundup: Issuance continues with more to price in Europe, U.S.

Traditionally the third quarter tends to be the least active of the year for the CLO market. As yet, however, there is no sign that issuance is taking a break for the summer, with five new U.S. CLOs pricing and another four in the near-term pipeline. Europe is also not quite done, with several more managers said to be eyeing a print before the end of July. Global volume YTD stands at $76.13 billion, according to LCD.

Stateside, a comparison between this month’s issuance and last year neatly sums up the ongoing strength of this year’s new issue market. At $5.67 billion with two and a half weeks yet to go, July 2014 supply has put July 2013’s full month supply $3.37 billion in the shade.

At $66.64 billion from 124 deals, according to LCD, issuance to date is currently fourth in line to the title of largest annual tally ever behind 2006 ($97.01 billion), 2007 ($88.94 billion), and 2013 ($82.61 billion). By comparison, YTD issuance in 2013 was $43.69 for 89 deals.

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

  • Global CLO Volume
  • Deal Pipeline, US and Europe
  • European arbitrage CLO issuance and institutional loan volume


Sarah Husband

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Despite rise in LBO activity, public-to-private deals remain scarce

Take-private buyouts were virtually absent in the first half even as other forms of LBO activity picked up. The reason, participants say, is that public-to-private deals face powerful headwinds from:

  • sky-high public share prices,
  • record profit margins,
  • aggressive competition for properties from strategic buyers, and
  • regulatory pressure to keep leverage levels in check.

With all of these factors working against public-to-private deal-making, it’s no wonder that of the $89 billion in LBO deal flow that LCD tracked during the first half, a mere $3.1 billion, or 3.5%, funded public-to-private transactions. That is the smallest share for P2P deals on record (the period with the lowest dollar total remains 2009, at a mere $1.06 billion).

LCD subscribers, please click here for full story, analysis, and chart:

  • LBO volume
  • Average purchase-price and enterprise multiples

Steve Miller

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

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Weekly CLO pipeline falls to $9.59B, according to S&P Ratings

Over the past week, the pipeline of CLOs in various stages of the rating process but for which final ratings have not yet been assigned decreased to $9.59 billion, from $10.14 billion last week, according to a report from S&P’s Structured Finance Ratings Group (see attached PDF).

All told, S&P expects 20 new vehicles to close based on deals in the pipeline, versus 21 from last week. On the other side of the ledger, optional redemptions for CLOs based on notices received by S&P now stand at roughly 10 vehicles, versus nine from last week.

weekly_CLO_chart_2014-07-09

 

 

 

 

 

 

 

 

 

 

 

Full story, analysis, and pdf details are available to LCD subscribers, please click here.

 

 

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Leveraged loan funds report eighth consecutive week of outflows

Cash outflows for bank loan funds increased to $457 million in the week ended July 2, from $424 million the previous week, but were well below the $1.2 billion three weeks ago, according to Lipper.

This is the eighth consecutive outflow, for a net $4.94 billion withdrawal over that span, representing the largest multiweek depletion since a run of outflows in August 2011. Extrange-traded fund inflows of $28 million barely offset outflows from mutual funds of $485 million.

The outflow marks the eleventh weekly withdrawal in the past 12 weeks, a stretch that put an end to a 95-week inflow streak totaling $66.7 billion.The trailing four-week reading moves to negative $618 million per week, from negative $779 million last week and $792 million two weeks ago.

Year-to-date inflows now total just $1.2 billion, of which $804 million, or 70% of the sum, is ETF-related. In the comparable year-ago period, inflows were $28 billion, with 12% tied to ETFs.

The change due to market conditions was positive $323 million this week compared to total assets of $108.8 billion at the end of the observation period, with ETFs comprising $8.2 billion of the total, or approximately 8%. – Joy Ferguson

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Leveraged loan funds report eighth consecutive week of outflows

Cash outflows for bank loan funds increased to $457 million in the week ended July 2, from $424 million last week, but were well below the $1.2 billion three weeks ago, according to Lipper.

This is the eighth consecutive outflow, for a net $4.94 billion withdrawal over that span, representing the largest multiweek depletion since a run of outflows in August 2011. Extrange-traded fund inflows of $28 million barely offset outflows from mutual funds of $485 million.

The outflow marks the eleventh weekly withdrawal in the past 12 weeks, a stretch that put an end to a 95-week inflow streak totaling $66.7 billion.The trailing four-week reading moves to negative $618 million per week, from negative $779 million last week and $792 million two weeks ago.

Year-to-date inflows now total just $1.2 billion, of which $804 million, or 70% of the sum, is ETF-related. In the comparable year-ago period, inflows were $28 billion, with 12% tied to ETFs.

The change due to market conditions was positive $323 million this week compared to total assets of $108.8 billion at the end of the observation period, with ETFs comprising $8.2 billion of the total, or approximately 8%. – Joy Ferguson

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2Q Loan Investor Market: CLO activity and size booms, unwinding legacy 1.0′s make mark

Every aspect of CLO generation pushed skyward in the second quarter. Formation of new vehicles pushed to a quarterly high of $35.25 billion. Moreover, the number of managers that inked a deal during the 12 months to the end of June, for instance, reached a post-credit-crunch high of 77, from 92 in 2013.

Muscular demand up and down the capital stack has also brought Humvee-sized CLOs back into fashion, with the economy models of recent years now passé. On average, 2014 vehicles weigh in at $542 million – and an even more sturdy $570 million during the second quarter alone – up from $481 million in 2013. For reference, the 1.0-era high was $571 million, from 2007.

Managers expect the good times to continue in the CLO market. For one thing, the pipeline of new vehicles, by all accounts, has never been more crowded. For another, demand for CLO equity and liabilities has shown no sign of flagging. Finally, with retail on its heels for the time being, CLO managers are able to call the tune on secondary prices and new-issue clearing levels. For these reasons, in part, strategists across the Street have raised their 2014 volume forecasts in recent months. Here are some of the current views:

  • Wells Fargo: $80-90 billion for the year
  • J.P. Morgan: the upper end of a $90-100 billion range
  • Morgan Stanley: $85-95 billion
  • Credit Suisse: roughly $90 billion

This year’s new-deal bonanza notwithstanding, unwinding legacy 1.0 vehicles have slowed the growth of CLOs outstanding, thereby acting as a drag on CLO buying power overall. This chart from Wells Fargo CDO analyst David Preston illustrates the point:

– Steve Miller

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

 

 

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Leveraged loan break prices push above par in June as market firms

Amid firm market conditions throughout the month of June, the average price at which first-lien institutional loans broke into the secondary market rose to a three-month high of 100.26% of par, from 99.84 in May.

LCD subscribers can click here to access full story, analysis, and charts:

  • Averaged difference between OID and break price
  • Average new-issue yield to maturity for leveraged loans


– Kerry Kantin

 

 

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June US CLO issuance sets all-time record as risk retention looms

The supercharged CLO market notched another record with June’s new issue supply of $13.78 billion, which counts as the most ever issued in a single month, according to LCD, eclipsing a previous high of $13.50 billion in August 2006.

Issuance in the year to date is now at $60.57 billion from 113 deals, according to LCD.

 

For LCD subscribers, please click here to access full story, analysis, charts:

  • Quarterly issuance
  • US Institutional Spreads


– Sarah Husband