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Red October: Second-liens suffer in rough month for leveraged loan market

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It’s no great surprise, but second-lien prices have fallen further than first-lien prices during the loan market’s October setback. Indeed, the average bid of first-lien paper in the S&P/LSTA Leveraged Loan Index has dropped 0.34 points, to 97.87 on Oct. 24, from 98.21 on Sept. 30. Over the same period, the average second-lien bid has slumped 1.42 points, to 97.86, from 99.28.

LCD subscribers can click here for full story, analysis, and the following charts from this article:

  • Monthly returns
  • Average Spread to maturity for leveraged loans
  • Averaged new-issue yield to maturity
  • Second-lien volume

– Steve Miller

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

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Leveraged loan funds see largest outflow since Aug. 2011, led by mutual funds

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Cash outflows from bank loan funds swelled to $1.66 billion during the week ended Oct. 22, up from a $946 million outflow in the previous week, according to Lipper. The reading reflects mutual fund outflows of $1.56 billion, plus a $98 million outflow from the exchange-traded fund segment, and it represents the largest outflow since the $2.12 billion recorded for the week ended Aug. 17, 2011.

The latest reading represents the 26th outflow in the past 28 weeks, for a net redemption of $16.8 billion over that span.

The trailing four-week average deepens to negative $1.22 billion from negative $897 million last week and negative $807 million two weeks ago. The four-week average surpasses the previous high reading of negative $944 million for the four weeks ended Aug. 24, 2011.

The year-to-date fund-flow reading pushes deeper into negative territory, at roughly $9.68 billion, based on a net withdrawal of $9.71 billion from mutual funds against a net inflow of $32 million to ETFs. In the comparable year-ago period, inflows totaled $46.65 billion, with 11% tied to ETFs.

The change due to market conditions was positive $322 million, versus total assets of $96.9 billion at the end of the observation period. The ETF segment comprises $7.4 billion of the total, or approximately 8%. – Joy Ferguson

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Final US risk retention has CLOs retaining 5% skin; equity throttle out

The terms of the final U.S. risk retention rule have been released, with little material change to the regulation with respect to CLOs, according to the LSTA.

This means that once the regulation goes into effect two years after it has been published in the Federal Register, CLO managers will have two methods by which to comply with the regulation, the manager as sponsor option or the arranger option.

Manager retention means the manager can retain 5% of the entire size of the CLO, vertically or horizontally.

The one piece of good news from the final rule is that the ‘cash throttle’ has been removed. This would have restricted the equity retention from receiving any payments before the notes began to amortise, which would have rendered retention via a horizontal piece unfeasible.

Loan arranger retention is where provided that the CLO buys 100% of eligible loan collateral, the manager would not have to retain 5% risk in the structure. Eligible collateral is defined as a loan tranche whereby the arranging bank retains 5% for the life of the loan. This is widely considered a non-option by market players given that banks are unlikely to agree to retain a portion of loans they underwrite for the purpose of the regulation.

The explicit third-party equity option has not been accepted, says the LSTA. Neither has the Qualified CLO concept or the expansion of the Qualifying Loan definition.

The FDIC votes on the regulation today, while the Federal Reserve will vote tomorrow.

All CLOs issued prior to the effective date are expected to be grandfathered.

Bram Smith, the LSTA’s executive director, today issued a statement expressing its disappointment with the final terms, which will “negatively impact American credit markets and make financing for U.S. companies more expensive and scarce.”

The statement continues, “Ironically, while the risk retention rule revealed today does not cover the vast majority of residential mortgages – one of the major sources of the financial crisis – the agencies have decided to proceed with a one-size-fits-all approach that unfairly harms CLOs, a historically safe financial product that in no way contributed to the financial crisis this rule aims to safeguard against in the future. In fact, CLOs performed exceedingly well throughout the financial crisis, and no investor has ever lost money on a senior CLO note.” – Sarah Husband

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Leveraged Loans: US braces for risk retention as volatility hits – CLOs

CLO roundup 2014-10-20 chart 1

Broader market volatility gave the CLO market cause for concern last week with widening liability spreads threatening to disrupt the new-issue pipeline over the coming weeks. Still, for others, the sharp drop in loan prices created opportunity, with one of last week’s transactions widely rumoured to be a print and sprint. This week should again be eventful with two industry conferences and the anticipated release of the U.S. risk retention rules.

Against this backdrop, U.S. CLO new-issue volume in the year-to-date rose to $101.01 billion by the end of the week, from 187 deals, according to LCD. During the same period a year ago the market had issued $61.42 billion from 127 CLOs. – Staff Reports

For more news, analysis, and data on the leveraged loan market and CLO segment check out or Loan Market Primer.

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Market Reset: Is this the new normal for leveraged loans?

Amid softening technical conditions and the risk-off theme that has dominated capital markets lately, loan yields have climbed 50-75 bps over the past month, with prices on loans falling markedly, as evidenced by the secondary bid distribution chart.

loan bids by range

Does the softer market represent a new normal for leveraged loans?

The outlook, as always, is in the eye of the beholder. In recent days, stability in the equity markets has allowed loan prices to find a bottom. That said, participants suggest the bias for the time being may be negative. Here’s why:

  • Loan fund flows: managers expect outflows to persist, what with rates falling in recent weeks. That will put more supply in the system as managers sell loans to meet redemptions.
  • Relative-value players: HY funds also remain net sellers of loans, participants say, further pressuring prices.
  • CLOs: The pace of prints remained robust in early October with managers inking $6.5 billion through the 16th, pushing year-to-date issuance to a record $99.9 billion. Still, players expect the number of new deals to fall significantly until conditions improve. That may drain liquidity from the system in the months ahead.
  • Supply: while off the post-credit-crunch highs of August, there remains $33.7 billion on the M&A forward calendar, much of which will hit the market over the final months of 2014. Given today’s flagging loan demand, placing this paper may be challenging.

 

This analysis is part of a more detailed LCD News story, available to subscribers here. – Steve Miller

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

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Leveraged loan fund outflows reach nearly $1B, led by mutual funds, 14th straight week of outflows

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Cash outflows from bank loan funds increased to $946 million during the week ended Oct. 15, according to Lipper. The reading reflects mutual fund outflows of $869 million plus a $76 million outflow from the exchange-traded fund segment.

The latest reading is an uptick from an outflow of $825 million last week and it represents the 25th outflow in the past 27 weeks, for a net redemption of $15 billion over that span.

The trailing four-week average deepens to negative $897 million per week, from negative $807 million last week and negative $686 million two weeks ago. This is the largest average since a negative $944 million reading for the four weeks ended Aug. 24, 2011.

The year-to-date fund-flow reading pushes deeper into negative territory, at roughly $8 billion, based on a net withdrawal of $8.2 billion from mutual funds against a net inflow of $131 million to ETFs. In the comparable year-ago period, inflows totaled $45.9 billion, with 11% tied to ETFs.

The change due to market conditions was negative $829 million, versus total assets of $98.3 billion at the end of the observation period. The ETF segment comprises $7.4 billion of the total, or approximately 8%. – Joy Ferguson

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Leveraged loan fund outflows stay heavy in 13th consecutive week

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Cash outflows from bank loan funds moderated, but remain deep in the red, at $825 million during the week ended Oct. 8, according to Lipper. The reading is based on deeper mutual fund outflows, at $899 million, dented by an inflow of $74 million to the exchange-traded fund segment.

While less than last week’s $1.4 billion outflow, the latest withdrawal is the 24th outflow of the past 26 weeks, for a net redemption of $14 billion over the span.

With this week’s outflow, the trailing four-week average deepens to negative $807 million per week, from negative $686 million last week and just negative $435 million the week prior. A recent peak was negative $858 million from the week ended June 11.

The year-to-date fund-flow reading pushes deeper into negative territory, at $7.1 billion, based on a net withdrawal of $7.3 billion from mutual funds against a net inflow of $207 million to ETFs. In the comparable year-ago period, inflows totaled $45.4 billion, with 11% tied to ETFs.

The change due to market conditions was positive $81 million, which is almost nil versus total assets of $100.1 billion at the end of the observation period. The ETF segment comprises $7.6 billion of the total, or approximately 8%. – Matt Fuller

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

 

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Leveraged loan fund outflows grow to $1.44B, 4x increase, led by mutual funds

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Cash outflows from bank loan funds increased nearly fourfold, to $1.44 billion during the week ended Oct. 1, versus $382 million last week, according to Lipper. The recording is the largest outflow since the week ended Aug. 6, when $1.5 billion left loan funds.

The influence of bank-loan ETFs on this week’s number was 18%, or $262 million, versus an outflow of $48 million from ETFs last week.

There now have been 23 weeks of outflows over the past 25 weeks, for a total outflow of $13.3 billion over that span, which follows a record-shattering 95-week inflow streak that totaled $66.7 billion.

With this week’s large outflow, the trailing four-week average gaps out to a negative $686 million per week, from negative $435 million last week. This measure remains below the recent peak of negative $858 million from the week ended June 11.

The year-to-date fund-flow reading pushes deeper into negative territory, at $6.3 billion, based on a net withdrawal of $6.4 billion from mutual funds against a net inflow of $133 million to ETFs. In the comparable year-ago period, inflows totaled $45 billion, with 11% tied to ETFs.

The change due to market conditions was negative $126 million, versus total assets of $100.8 billion at the end of the observation period. The ETF segment comprises $7.5 billion of the total, or approximately 7%. – Joy Ferguson

 

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The 3rd Quarter Leveraged Loan Market, in 6 Charts

The U.S. leveraged loan market downshifted in 2014′s third quarter, prompting yields to rise. Things looks pretty much like this:

Despite strong CLO issuance,

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… a combination of record retail outflows …

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… and a spike in M&A volume …

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… pushes clearing yields higher again.

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Opportunistic activity falls as a result …

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… putting a damper on volume.

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These charts are from a quarterly wrap, courtesy S&P Capital IQ/LCD’s Steve Miller.

For lots more charts, news and stats on the leveraged loan market check out LeveragedLoan.com, a free site powered by LCD to promote the asset class.

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Leveraged loans out-perform – sort of – high yield bonds, other fixed-income in grim September

returns by asset class

After gaining 0.15% in August, the S&P/LSTA Leveraged Loan Index fell 0.60% in September, its worst monthly performance since June 2013. September’s setback dropped the year-to-date return for the S&P/LSTA Index to 2.11%, from 2.73% at the end of August.

Loans were hardly the only asset class to feel the pain in September. Risk assets broadly were dented by geopolitical concerns. As well, expectations for rising rates pushed the 10-year Treasury yield up 17 bps, to 2.52% on Sept. 30, from 2.35% at the end of August, according to the Department of the Treasury. As a result, loans outperformed equities as well as the three fixed-income categories we track here monthly.

This analysis is taken from S&P Capital IQ/LCD’s 3rd-quarter data wrap-up, available to LCD News subscribers here. Also detailed in that story:

  • Monthly loan returns, per the S&P/LSTA Index
  • Annual returns, per the Index
  • Loan returns by rating
  • Loan outstandings
  • CLO issuance
  • Leveraged loan trading prices
  • Loan M&A forward calendar