LCD’s estimate of loan fund flows (8/27): -$111M Lipper/-$156M total

On Thursday, Aug. 27, outflows from loan mutual funds totaled an estimated $111 million based on the Lipper FMI universe of weekly reporters, or $156 million based on the total universe of open-ended funds plus ETFs, versus outflows of $113 million/$143 million on Wednesday, Aug. 26.

For the five business days ended Aug. 27, outflows totaled $933 million (Lipper FMI universe) and $1.21 billion (total universe plus ETFs), versus outflows of $783 million/$979 million during the five business days ended Aug. 20.


LCD compiles these data with the cooperation of a number of mutual-fund complexes. LCD is collecting daily fund-flow data for a representative sample of loan funds. We then take the weighted average AUM change each day from contributors and extrapolate it to:

  • the Lipper FMI AUM universe of $83.9 billion (as of Aug. 26) to provide a “Lipper-style” daily reading of inflows/outflows, and
  • the entire open-ended loan universe of $117 billion to give a fuller view of estimated inflows/outflows.

Cruel summer: Loan bids end August in red as losses deepen

After drifting lower throughout the month, the average bid of LCD’s flow-name composite took a harsher fall in today’s reading, dropping 51 bps to 98.15% of par, versus the previous reading of 98.66 on Aug. 19.

Today’s drop is the steepest since December 2014, though note it is a week-over-week observation (the flow-names will return to the regular twice-weekly Tuesday/Thursday schedule after Labor Day).

While the flow-name composite had been steadily declining throughout August – there is not one single positive reading this month – declines accelerated in today’s reading. Equities have tumbled in very volatile trading in recent days as concerns about China’s economy have intensified.

Among the 15 names in the sample, 14 declined, and one advanced from the prior reading. Posting by far the steepest loss was the B-/B3 Avaya B-7 term loan due 2020 (L+525, 1% LIBOR floor), which is bid 3.75 points lower, at 84.25. Though there’s no news specific to the credit this week, higher-beta loans and those in out-of-favor sectors have well underperformed the broader market during this recent patch of volatility. By contrast, no other loan moved more than half a point, and excluding Avaya, the average bid would be down 28 bps.

Overall, lower-rated loans under performed: the nine loans in the sample rated B+ or higher, on average, declined 23 bps, to 99.31; the six loans rated B or lower, on average, fell 91 bps, to 96.42.

With a 0.52% drop, loans have held up well as compared with other asset classes in recent sessions. The average bid of the flow-name bond composite fell 94 bps, or 0.96%, over the week, to 96.78% of par, while even with today’s rebound, as of about 2:30 p.m. EDT, the S&P 500 had tumbled nearly 8.6% from the Aug. 19 close of 2,079.61.

Nevertheless, a 51 bps drop is nevertheless a significant move for the typically more stable loan asset class, and pushes the spread to maturity implied by the average bid out to L+430.9, which is 12.6 bps wider than a week ago, 34.7 points wider than the end of July and at its widest level since the end of December. The average bid, meanwhile, is at its lowest level since Jan. 6 (Note there have been some changes to the sample this year, so these are not apples-to-apples comparisons).

Overall, LCD’s flow-name bid declined a total of 1.51 points (1.51%) over the course of the month, down from 99.65 in the final July reading. High-yield and equities suffered a worse drubbing – the average flow-name bond composite slid 2.77 points (2.78%) during the month, while as of just after 2:30 p.m. EDT, the S&P 500 was on track to well underperform both loans and high-yield, off over 9.6% from the July 31 close of 2,103.84.

Given the wild swings in equities in recent days, arrangers and issuers will wait to see what the next 1.5 weeks bring, but the data above indicate that clearing yields are bound to widen when the primary market gets back to business after Labor Day. Market participants are also keeping a close eye on how the recent volatility – and the ensuing expectations that a September rate hike is no longer in the cards – will impact loan funds, which have seen outflows accelerate in recent days. LCD data project, per the Lipper sample of weekly reporters, for the five business days ended Aug. 25, outflows totaled $1.01 billion. As for CLOs, the recent weakness in the secondary creates a buying opportunity for managers, but liabilities could widen as well.

With the average loan bid sinking 51 bps, the average spread to maturity jumped 13 bps, to L+431.

By ratings, here’s how bids and the discounted spreads stand:

  • 99.31/L+375 to a four-year call for the nine flow names rated B+ or higher by S&P or Moody’s; STM in this category is L+371.
  • 96.42/L+535 for the six loans rated B or lower by one of the agencies; STM in this category is L+506.

Loans vs. bonds
The average bid of LCD’s flow-name high-yield bonds plunged 94 bps, to 96.78% of par, yielding 7.65%, from 97.72 on Aug 19. The gap between the bond yield and discounted loan yield to maturity stands at 339 bps. – Staff reports

To-date numbers

  • August: The average flow-name loan decreased 150 bps from the final July reading of 99.65.
  • Year to date: The average flow-name loan increased 123 bps from the final 2014 reading of 96.92.

Loan data

  • Bids slip: The average bid of the 15 flow names tumbled 51 bps, to 98.15% of par.
  • Bid/ask spread wider: The average bid/ask spread widened one basis point, to 38 bps.
  • Spreads gain: The average spread to maturity – based on axe levels and stated amortization schedules – climbed 13 bps, to L+431.

High yield bond prices fall to 2015 low; California Resources leads decliners

The average bid of LCD’s flow-name high-yield bonds declined 94 bps in today’s reading, to 96.78% of par, yielding 7.65%, from 97.72% of par, yielding 7.42%, on Aug. 19. There were 10 decliners and just one gainer, with four of the 15 constituents unchanged.

Today’s decline comes after a modest 25 bps advance in last week’s reading, and it is the fourth decline in five readings. Take note that this is a seasonal once-a-week observation, so it’s covering five sessions, rather than three. Next week, the measurement will be also be week-over-week.

Today’s decline was led by a loss of 4.5 points on California Resources 6% notes due 2024. The rest of the decliners were each down two points or less. The negative reading incorporates several heavy sessions since last Wednesday, including Monday’s massive global market sell-off sparked by steep losses in the Shanghai Composite.

Today’s average of 96.78 marks the lowest reading of 2015. The average is down 69 bps from the Aug. 13 reading nearly two weeks ago. Dating back nearly four weeks to the July 30 reading, the average is down 277 bps. However, due to a revision in the sample, the bond bids are still up 109 bps in the year to date.

With today’s decline in the average bid price, the average yield to worst widens 23 bps, to 7.65%, and the average option-adjusted spread to worst climbed 28 bps, to T+617. Both yield and spread are at 2015 wides.

The yield and spread in today’s reading are wider than in the broad index. The S&P Dow Jones U.S. Issued High Yield Corporate Bond Index closed yesterday, Aug. 25, with a 7.29% yield-to-worst and an option-adjusted spread to worst of T+587.

For further reference, take note that a June 24, 2014 reading of 106.98 – close to the February 2014 market peak of 107.03 – had the flow-name bond average yield at 5.02%, an all-time low, but spreads weren’t quite there. Indeed, the average yield was 7.63% at the prior-cycle peak in 2007, and the average spread at the time was T+290.

Bonds vs. loans
The average bid of LCD’s flow-name loans fell 51 bps in today’s reading, to 98.15% of par, for a discounted loan yield of 4.26%. The gap between the bond yield and discounted loan yield to maturity is 339 bps. – Staff reports

The data

  • Bids rise: The average bid of the 15 flow names declined 94 bps, to 96.78.
  • Yields fall: The average yield to worst slipped 23 bps, to 7.65%.
  • Spreads tighten: The average spread to U.S. Treasuries widened 28 bps, to T+617.
  • Gainers: The sole gainer was Charter Communications 5.75% notes due 2024, which rose a quarter of a point.
  • Decliners: The 10 decliners were led by California Resources 6% notes due 2024, which slumped 4.5 points, to 69.
  • Unchanged: Four of the constituents were unchanged.

European leveraged loans see 6th-biggest loss ever

The S&P European Leveraged Loan Index (ELLI) lost 0.16% on Aug. 24 following the sharp fall in global equity markets. This was the sixth biggest daily loss since the Index began tracking daily pricing in May 2013 (excluding currency fluctuations).

Yesterday’s loss pushed August market value return further into the red, at negative 0.29% for the month. As a result, the Index was flat so far in August, at 0.01%, as the negative market value virtually wiped out 0.30% of interest return.

Market players said that many names were down a quarter to half a point yesterday, as Europe showed its habitual resilience despite the turmoil in other markets, although some cross-border names or those with high-yield bonds took a larger step downwards. Some assets came loose, including from market-value funds, but there were buyers on hand with CLOs looking to ramp warehouses, market sources said.

This morning, European equities were firmer despite further weakness overnight in China, and trading activity in the loan market was muted with levels broadly unchanged. The iTraxx Crossover tightened, seen at 352/354 at press time. Loan market participants say they are now waiting to see, in the near term, whether the broader volatility will have any impact on the pace of issuance and on the clearing yields of the next batch of primary deals. – Staff reports



Loan-fund AUM edges up in July, but outflows heavy so far in August

After declining by $2.8 billion in June, loan mutual funds’ asset under management edged up $343 million in July, to $136 billion, according to Lipper FMI and fund filings, as concerns over the potential Grexit faded after Greece agreed to a bailout package from the European Union. July’s small increase left loan fund AUM down $5.3 billion over the first seven months of 2015, from 2014’s final reading of $141.3 billion (though outflows resumed and intensified in early August amid choppy conditions across the capital markets, as we discuss below).

Loan fund AUG in July



Oil & Gas companies account for more than a quarter of 2015 defaults

The global corporate default tally climbed to 70 issuers after two U.S.-based exploration-and-productions companies triggered a default in the past week. Oil & Gas companies now account for more than a quarter of defaults so far this year, according to a report published by Standard & Poor’s on Friday.

SandRidge Energy entered into an agreement to repurchase a portion of its senior unsecured notes at a significant discount to par, prompting S&P to lower its corporate credit rating on Aug. 14 to D, from CCC+, on what the agency considers to be a distressed transaction and “tantamount to a default”.

Samson Resources failed to make the interest payments due on its $2.25 billion of 9.75% unsecured 2020 notes due Aug. 15. Standard & Poor’s subsequently lowered Samson’s corporate credit rating to D, from CCC-.

Of the 70 defaulting entities, 40 are based in the U.S., 14 in emerging markets, 12 in Europe, and 4 in the other developed nations. By default type, 22 defaulted due to missed interest or principal payments, 19 because of distressed exchanges, 14 reflected bankruptcy filings, seven were due to regulatory intervention, six were confidential defaults, one resulted from a judicial reorganization, and one came after the completion of a de facto debt-for-equity swap.

Standard & Poor’s Global Fixed Income Research estimates that the U.S. corporate trailing-12-month speculative-grade default rate will rise to 2.8% by March 2016, from 1.8% in March 2015 and 1.6% in March 2014. – Staff reports


American Apparel raises going concern warning as losses deepen

Embattled clothing retailer American Apparel issued a going concern warning on Monday, stating once again that it may not have enough liquidity to continue its operations for the next 12 months amid deepening losses and negative cash flows.

American Apparel said in an SEC filing after yesterday’s close that it had reached an agreement with a group of lenders, led by Standard General, to replace its $50 million credit facility with a $90 million asset-based revolver, maturing April 4, 2018. Wilmington Trust replaces Capital One as the administrative agent, the filing said.

Despite the cash infusion, American Apparel further warned that if it is unsuccessful in addressing its near-term liquidity needs or in adequately restructuring its obligations outside of court, it “may need to seek protection from creditors in a proceeding under Title 11” of the US bankruptcy code.

Note the company has a $13 million interest payment on its 15% first-lien 2020 bonds in October.

Shares in the name fell 4% to 14 cents as at mid-morning on Tuesday, having lost more than 85% this year.

As reported, American Apparel said it had been in ongoing discussions with Capital One regarding a potential waiver in an effort to avoid a potential default, and as a result of these discussions, was unable to file its second quarter 2015 10-Q filing before the regulatory deadline.

According to yesterday’s filing, the company was not in compliance with the minimum fixed charge coverage ratio and the minimum adjusted EBITDA covenants under the Capital One Credit Facility. For the April 1, 2015 through June 30, 2015 covenant reference period, its coverage ratio was 0.07 to 1.00 as compared with the covenant minimum of 0.33 to 1.00, and its adjusted EBITDA was $4,110 compared with the covenant minimum of $7,350. The covenant violations were waived under the Wilmington Trust Credit Facility.

The retailer on Monday confirmed its second-quarter results, released on a preliminary basis last week. As reported, second-quarter net losses jumped 20% to $19.4 million, or $0.11 per share, from a loss of $16.2 million, or $0.09 per share in the year-ago period. This is the company’s 10th consecutive quarterly loss.

Revenue fell approximately 17% from the year-ago period, to $134 million.

Adjusted EBITDA for the three months ended June 30, 2015 was $4.1 million, versus $15.9 million for the same period in 2014. As of Aug. 11, 2015, American Apparel had $11,207 in cash.

As reported, the company said it has begun discussions to analyze “potential strategic alternatives,” which may include refinancing or new capital raising transactions, amendments to or restructuring of its existing debt, or other restructuring and recapitalization transactions.

American Apparel is rated CCC- by Standard & Poor’s, with negative outlook. Its 13% senior secured notes due 2020 are rated CC, with a recovery rating of 5. Moody’s last week downgraded the company to Caa3 from Caa2, and placed the company under review for downgrade. – Rachelle Kakouris


Loan defaults set to hit 6-month high with Samson Resources Ch 11 filing next month

The default rate of the S&P/LSTA Leveraged Loan Index will increase to 1.27% by principal amount next month, from 1.17%, when Samson Resources via Samson Investment Company files for bankruptcy, tripping a default on its second-lien secured loan. The default rate by issuer count will tick up to 0.77%, from 0.67%, according to LCD.

The default rate would be at a six-month peak, or the highest level since 3.79% as of March 31, although that was including Energy Future Holdings, which is no longer counted in the default rate due to the rolling-12-month basis. Excluding EFH, the default rate post-Samson would hit its highest level since February 2014 when it was 1.86%, according to LCD.

Privately held, KKR-controlled Samson on Friday announced publicly that it has entered into a restructuring support agreement with certain lenders holding 45.5% of the company’s second-lien debt, and with its sponsor on a proposed balance sheet restructuring that “would significantly reduce the company’s indebtedness and result in an investment of at least $450 million of new capital.”

Under the terms of the RSA, second-lien lenders, including Silver Point, Cerberus and Anschutz, have agreed to invest at least $450 million of new capital to provide liquidity to the balance sheet post reorganization and permanently pay down existing first-lien debt, the company said.

As a result, the company said it would not make the interest payment due today under its sole outstanding corporate issue, the $2.25 billion of 9.75% unsecured notes due 2020, but instead would use the 30-day grace period triggered by its non-payment “to build broader support for the restructuring and continue efforts to document and ultimately implement the reorganization transaction as part of a Chapter 11 filing.” The debt is worthless, trading below 1 cent on the dollar, down from around 30 in March, and a par context a year ago before the bear market mauling in oil.

The Samson loan default would not be particularly large, as the second-lien term loan was originally $1 billion in the Index. However, it’s notable as the second largest loan default this year, or since Caesars Entertainment kicked off the New Year in mid-January with the sixth largest default on record, at $5.36 billion across four tranches in the Index, according to LCD.

Assuming no other defaults leading up to Samson next month, it would become sixth loan-issuer default in the Index this year, following rival coal credits Alpha Natural Resources earlier this month, Patriot Coal in May, and Walter Energy in April, as well as exploration-and-production company Sabine Oil & Gas in April. Meanwhile, the eight ex-Index defaults this year are Altegrity, Allen Systems, American Eagle Energy, Boomerang Tube, Chassix, EveryWare, Great Atlantic & Pacific Tea, and Quicksilver Resources.

The shadow default rate for the Index is currently at 0.72%, down from 0.82% last month, but nearly triple the 0.29% rate in April. There is $5.51 billion of Index outstandings on the shadow list, and that includes Samson since its hiring of Kirkland & Ellis and Blackstone Group in February. This rate includes loans that are paying default interest but which are still performing, loan issuers that have bonds in default, and issuers that have hired bankruptcy counsel or that have secured a forbearance agreement.

There are five loan issuers on the shadow list that are publicly known. Beyond Samson, it’s Gymboree, Dex Media, Millennium Health, and Vantage Drilling, all of which are consulting advisors. – Matt Fuller

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