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Private equity: Sponsors are busy, but public-to-private deals remains scarce as stocks rise

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In recent years the time-honored LBO process – a private equity shop finds a public company, buys it using debt, then cashes out later - has become a victim of its own success, as PE firms have helped encourage corporate America to slim expense lines, driving profit margins to all-time highs.

At the same time, record stock prices have driven purchase-price multiples up even as regulatory pressure has put a cap on leverage. These factors have hurt the ability of PE firms to find suitable LBO candidates despite their full war chests, which Prequin says totaled roughly $397 billion at the end of 2013.

Therefore, participants expect PE firms to continue to work their portfolio companies via tack-on deals, sponsor-to-sponsor trades, and recaps, when the window for such deals is open. Meanwhile, straight public-to-private deals remain most rare. – Steve Miller

This analysis is part of a longer look at new issuance in the leveraged loan space. It is available to LCD News subscribers here.

For leveraged finance news and market talk follow Steve Miller on Twitter.

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LSTA files suit against Fed, SEC over CLO risk retention

The Loan Syndications and Trading Association (LSTA) has filed a lawsuit against the Federal Reserve and the Securities Exchange Commission over the final risk-retention-rule release last month.

The petition for review, filed Nov. 10, alleges the final rule is “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.”

The petition for review represents the first step in legal proceedings that the LSTA has taken against regulators in an effort to provide the CLO market with relief from the final risk-retention rule, which will require CLO managers to retain 5% of the deal. It is expected to take effect in about two years.

The LSTA said it filed the suit “reluctantly” and as a last resort. “The LSTA believes the regulatory agencies’ one-size-fits-all solution to risk retention with respect to collateralized loan obligations (CLOs) disproportionately punishes an industry that was not involved in the financial crisis, suffered practically no losses and currently provides critical financing to over 1,000 non-investment-grade companies,” LSTA executive director Bram Smith said in a statement.

“We have sought a reasonable solution for years and worked tirelessly to provide the agencies with workable and practical options because we believe the negative impact of the risk-retention rule on the CLO market and broader economy will be significant,” Smith added. “None of our material proposals were implemented into the rule.” – Kerry Kantin

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CLO roundup: Pricing schedule stays busy as European spreads widen

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Last week was an active one for the U.S. as market players looked to price CLO transactions ahead of the shortened Thanksgiving week. In Europe, meanwhile, November saw its first two pricings last week ahead of what could be a busy push into year-end. The big question, however, is whether widening liability spreads in Europe will lead some issuers to put transactions on hold until 2015.

Global issuance stands at $130.77 billion, according to LCD.

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

  • Deal pipeline
  • US arbitrage CLO issuance and institutional loan volume
  • European arbitrage CLO issuance and institutional loan volume

– Sarah Husband

Follow Sarah on Twitter for the latest CLO market news and insight.

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Leveraged loan issuers see 9% EBITDA growth in 3rd quarter

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Healthy economic growth in the third quarter helped leveraged loan issuers deliver another quarter of solid cash-flow growth. Year-over-year EBITDA growth averaged 9% among S&P/LSTA Index issuers that file publicly with the SEC, according to data from S&P Capital IQ. That is roughly on par with the second quarter’s pace, and it’s at the wide end of the recent high-single-digit range. – Steve Miller

This story is from a longer piece of analysis, available to LCD News subscribers, that also details

  • Leverage of outstanding loans
  • Leverage of LBO loans
  • Cash flow coverage
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Leveraged loan prices sink in trading as market volatility heats up

Amid October’s volatile market conditions, the average price at which first-lien institutional loans broke into the secondary slid to 99.20% of par, from 99.75 in September.

Another indication of the rocky conditions was that a mere $19.6 billion of loans broke for trading in October. That’s the lowest total since January, which is typically a slow month in terms of volume as arrangers begin to roll out deals after the holidays. –Kerry Kantin

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

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

 

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US Leveraged Loans Return 0.26% in Rough October

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The loan market began October like a bear and ended the month like a baby bull.

After slumping during the opening weeks of the month, loan prices rebounded in late October as technical conditions and investor sentiment improved. Indeed, the S&P/LSTA Index was able to eke out 0.26% gain by Halloween after racking up a 0.86% loss through Oct. 16. In September, by comparison, the Index was off 0.60% – its weakest performance since May 2012 – as a risk-off theme prevailed throughout the capital markets.

As usual, the largest loans that comprise the S&P/LSTA 100 Index were more responsive to market conditions, outperforming the broader Index in October with a 0.61% return after underperforming in September with a 0.96% decline.

October’s small gain pushed the year-to-date return for the S&P/LSTA Index to 2.38%, while the 100 Index edged up to 2.09%. By comparison, the respective figures for the same period in 2013 were 4.28% and 4.01%. – Steve Miller

This chart is taken from a longer analytical story from LCD News, available to subscribers, that also details

  • Annual loan returns
  • Secondary loan market prices
  • Loan Index returns
  • Loan outstandings
  • CLO issuance
  • Returns by asset class
  • Loan forward calendar

 

Follow Steve on twitter for leveraged finance insight and market talk.

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Outflows from leveraged loan funds moderate in 16th consecutive withdrawal

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Cash outflows from bank loan funds moderated to $428 million during the week ended Oct. 29, from a $1.7 billion outflow in the previous week, according to Lipper. The latest reading represents a 16th consecutive weekly withdrawal and the 27th outflow in the past 29 weeks, for a net redemption of $17.1 billion over that span.

The current reading reflects mutual fund outflows of $418 million, plus a $10 million outflow from exchange-traded funds. The influence of ETFs had been running a bit hotter, at 6% of the outflow last week and 8% the week prior.

The trailing-four-week average is negative $964 million, versus negative $1.2 billion last week. Recall that last week’s observation was the third largest outflow on record and the highest since $1.3 billion in the week ended Aug. 31, 2011.

The year-to-date fund-flow reading pushes deeper into negative territory, at roughly $10.1 billion, and it’s essentially all mutual funds, with ETFs technically positive $23 million for the year. In the comparable year-ago period, inflows totaled $47.3 billion, with 11% tied to ETFs, or $5.1 billion.

The change due to market conditions was positive $217 million, versus total assets of $96.7 billion at the end of the observation period, for roughly a 0.2% gain. The ETF segment comprises $7.4 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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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