The Leveraged Loan Distress ratio is another story, however. This ratio tracks loans bid below 80% of par in the secondary market. As is evident in the chart, the Distress ratio has spiked noticeably since this summer. – Staff Reports
The average bid of LCD’s flow-name high-yield bonds fell 132 bps in today’s reading, to 89.03% of par, yielding 10.58%, from 90.35% of par, yielding 10.05%, on Nov. 19. Performance within the 15-bond sample was deeply negative, with 12 decliners against two gainers and a lone constituent unchanged.
Today’s decline is a seventh-consecutive observation in the red, and it pushes the average deeper below the previous four-year low of 91.98 recorded on Sept. 29. As such, the current reading that has finally pierced the 90 threshold is now a fresh 49-month low, or a level not seen since 87.93 on Oct. 4, 2011.
The decrease in the average bid price builds on the negative 58 bps reading on Thursday for a net decline of 190 bps for the week. Last week’s losses were also heavy, so the average is negative 369 bps dating back two weeks, and the trailing-four-week measure is much worse, at negative 545 bps.
Certainly there has been red across the board, but several big movers of late continue to greatly influence the small sample. For example, in today’s reading, Intelsat Jackson 7.75% notes were off six full points—the largest downside mover today, to 44, and now 20.5 points lower on the month—while Hexion 6.625% paper was off five points, at 73.5, and Sprint 7.875% notes fell 5.5 points, to 77.
The market has been crumbling especially hard this week, with energy and TMT credits leading the charge, amid a lack of participation, the influence of speculative short-sellers, and despite signs that retail cash has been flowing into the asset class. There was a similar dynamic after Thanksgiving last year, sending the average to the year-end low of 93.33 on Dec. 16, 2014.
As for yield in the flow-name sample, the plunge in the average price—with many names falling into the 80s and a couple of others more deeply distressed—has prompted a surge in the average yield to worst. Today’s gain is 53 bps, to 10.58%, for a 2.92% ballooning over the trailing four week. This is a 13-month high and level not visited since 10.70% recorded on June 10, 2010.
The average option-adjusted spread to worst pushed outward by 47 bps in today’s reading, to T+791, for a net widening of 167 bps dating back four weeks. That level represents a wide not seen since the reading at T+804 on Sept. 23, 2010.
Both the spread and yield in today’s reading remain much wider than the broad index. The S&P U.S. Issued High Yield Corporate Bond Index closed its last reading on Monday, Nov. 23, with a yield to worst of 7.88% and an option-adjusted spread to worst of T+652.
Bonds vs. loans
The average bid of LCD’s flow-name loans fell nine bps, to 96.31% of par, for a discounted loan yield of 4.42%. The gap between the bond yield and discounted loan yield to maturity is 616 bps. — Staff reports
Bids fall: The average bid of the 15 flow names dropped 132 bps, to 89.03.
Yields rise: The average yield to worst jumped 53 bps, to 10.58%.
Spreads widen: The average spread to U.S. Treasuries pushed outward by 47 bps, to T+791.
Gainers: The larger of the two gainers was Valeant Pharmaceuticals International 5.875% notes due 2023, which rebounded 3.25 points from the recent slump, to 85.25.
Decliners: The largest of the 12 decliners was Intelsat Jackson 7.75% notes due 2021, which dropped six full points, to 44, amid this fall’s ongoing deterioration of the credit.
Unchanged: One of the 15 constituents was unchanged in today’s reading.
In October, loan mutual funds’ assets under management sank $1.6 billion, to $127 billion, amid further outflows from the asset class, according to data from Lipper FMI and fund filings.
On the plus side, it was the smallest decline in recent months, following negative $4.6 billion and negative $2.8 billion in August and September, respectively, and an increase of $343 million in July.
On the minus side, it leaves total loan AUM at the lowest point since May 2013 and down $48.1 billion from an apex of $175.1 billion in March 2014. – Steve Miller
The U.S. leveraged finance market logged $8.2 billion in new-issue volume last week, $2.75 billion from leveraged loans and $5.45 billion in high yield bonds, according to S&P Capital IQ LCD.
That’s the smallest amount since the end of the summer, as leveraged loan players, in particular, proceeded deliberately last week after Veritas cancelled a planned $5.3 billion debt package backing Carlyle’s LBO of the company.
The high yield market also had Veritas in mind, though a host of issuers drove by the market last week to complete deals, according to LCD’s Matt Fuller. – Staff reports
Amid a barrage of large institutional deals in market, some smaller loan transactions have had difficulty gaining traction. Others that were originally intended for a broader audience have been clubbed up. Wider spreads and the prospect of various other concessions have kept less time-sensitive middle market
business on the sidelines. — Jon Hemingway
Two of Garrison Capital’s investments, Speed Commerce and Forest Park Medical Center, were on non-accrual status in the recent quarter.
The investment in Speed Commerce comprised a $12 million term loan due 2019 (L+1,100 PIK, 1% floor) as of Sept. 30, a 10-Q showed. The fair value was marked at $9.7 million as of Sept. 30, and it accounted for 3.9% of assets.
In November 2014, Garrison Loan Agency Services was agent on a $100 million credit facility. Proceeds backed an acquisition of Fifth Gear and refinanced debt. Speed Commerce, based in Texas, provides web design and warehouse logistics services.
Nasdaq-listed Speed Commerce announced in April it hired Stifel, Nicolaus & Company as an advisor to explore a possible recapitalization or a sale of the company. Lenders have amended the loan several times, culminating on Nov. 16, when lenders agreed to a covenant requiring a sale of the company by Dec. 11.
Garrison Capital’s non-accrual investment in Forest Park included a lease to the San Antonio, Texas hospital and a $1.95 million term loan. The hospital has filed for bankruptcy due to a liquidity shortfall stemming from delays in obtaining third-party insurance contracts, and has hired an advisor to sell the facility.
Garrison Capital’s net asset value per share totaled $14.92 as of Sept. 30, compared to $15.29 as of June 30.
Garrison management attributed nearly half of the decline to a restructuring of SC Academy. Last quarter, that investment, a loan to Star Career Academy, was the lone non-accrual investment in the portfolio.
Star Career Academy, based in Berlin, N.J., provides occupational training for entry-level employment in health fields, cosmetology, professional cooking, baking and pastry arts, and hotel and restaurant management.
Garrison Capital is an externally managed BDC that invests in debt securities and loans of U.S. middle market companies. Shares trade on Nasdaq under the ticker symbol GARS. For additional analysis of Garrison Capital’s investment portfolio, see also “ActivStyle, Connexity loans added to Garrison Capital portfolio,” LCD News, Nov. 17, 2015. — Abby Latour
In the third quarter, average EBITDA growth among S&P/LSTA Index issuers that file publicly was 6.16%. That is down from 7.10% in the second quarter and is on the low-end of the recent range, according to data from S&P Capital IQ.
Energy continued to weigh on the broader average in the third quarter, though less so than during the prior three months. Excluding energy, the average year-over-year EBITDA growth was 0.91 percentage points higher in the third quarter at 7.07%. In the second quarter, by comparison, ex-energy EBITDA grew by 2.93 percentage points more, at 10.03%.
Other factors that have restrained cash flow growth this year include: (1) ever tougher year-over-year comps, (2) historically high margins across the business landscape, and (3) sluggish economic growth.
For these reasons, too, earnings growth across corporate America was lackluster again in the third quarter. S&P 500 companies, for example, posted an average year-over-year earnings-per-share growth of negative 1.6% overall and positive 6.5% excluding energy, according to S&P Capital IQ’s Bob Keiser. – Steve Miller
This analysis is taken from a longer LCD News story, available to subscribers here.
In order to provide subscribers with a useful gauge for secondary loan market volatility, LCD is introducing the Loan Volatility Metric (LVM).
Equity market players have long relied on the VIX to gauge volatility in the stock market. Since the VIX relies on option prices, a similar trend-line cannot be applied to the loan asset class. Consulting with numerous managers, LCD has developed the LVM to gauge volatility in the secondary loan market based on how the prices of individual loans in the S&P/LSTA Index move relative to their recent price range.
Specifically, the LVM tracks the percentage of loans that move more than the sum of the 100-day moving average of price changes and one standard deviation of those changes. To smooth the curve, we run a lagging-10-day average.
The following chart shows the LVM applied to the loan market since June 2007, with spikes in volatility annotated to provide historical context. The red line shows the average LVM over the duration of the chart. The blue shaded chart within the chart provides a closer look at the most recent trend.
We will include an LVM chart in our LCD Loan Index daily returns story each day. We appreciate any feedback.
For questions on the LVM or any LCD data or analysis contact Rob Polenberg: 212 438-2724
Meredith Coffey is Executive Vice President of the Loan Syndications and Trading Association.
There was good news and bad news in the Shared National Credit (SNC) Review that was released last Thursday. We will recap both, but before we do so, we first offer some background for those lucky souls that do not live and die by the SNC (and, relatedly, the Leveraged Lending Guidance).
In 2013, the OCC, Fed, and FDIC (“the agencies”) released the Leveraged Lending Guidance, which set forth guidelines by which banks should underwrite and participate in leveraged loans. In the beginning, the Guidance confused many market participants, who didn’t really understand what it required—and very publicly ran afoul of its strictures.
Over the past several years it has become clearer that Rule Number One of the Guidance was that banks should not underwrite “non-pass” credits. It also has become clearer that a critical measure of a “pass” credit was whether the company could show the ability to repay all its senior debt or half its total debt in 5–7 years from base cash flows.
While the Guidance laid down the rules, the SNC—which is an annual bank loan review conducted by the Federal Reserve, the OCC and the FDIC—has become the public report card on whether banks are living up to these rules. The good news is that banks are increasingly complying with the letter of the law.
In an October speech, Comptroller of the Currency Thomas Curry noted that “the 2015 SNC review found lower levels of leverage and improved repayment capacity in bank leveraged loan portfolios.” Likewise, the 2015 SNC Review itself “found the incidence of non-pass loan originations to new borrowers (either to hold or distribute) fell in the second half of the [SNC Review] year. Examiners noted improved compliance with underwriting expectations with regard to the 2013 leveraged lending guidance and subsequent frequently asked question (FAQ) documents.”
But there is always a “but.” And so, the SNC Review also notes that “gaps between industry practices and guidance remain.” Some 36% of newly originated leveraged transactions “exhibited structures that were cited as weak by examiners.” Their focus was on structure, with an eye to ineffective or missing covenants, liberal repayment terms, and incremental debt provisions that allow leverage to climb above starting levels and senior secured creditors to be diluted. In particular, SNC evidenced concern when incremental facilities were found in credit agreements with few, loose, or no maintenance covenants.
In effect, regulators seem to be concerned that borrowers have more ability to weaken structures after origination, while creditors now have fewer tools to slow deterioration in a credit’s quality. This may not have been elucidated in the original Leveraged Lending Guidance, but may now be part of an expanding focus of the agencies.
What do the statistics show?
First, LBO lending volume is off 17% since 2014, says S&P Capital IQ LCD. Though Leveraged Lending Guidance might be an obvious cause, lenders say the decline actually is largely due to sponsors choosing not to buy at sky-high purchase-price multiples. While sponsor prudence might be limiting buyout opportunities, the fact is that 2015’s LBOs also appear to be more conservative than last year’s vintage.
Shortly after the agencies slapped wrists over Guidance violations in mid-2014, leverage multiples on LBOs fell materially. The share of LBOs with leverage of at least 6x tumbled from 75% in the third quarter of 2014 to 27% in the second quarter of 2015, LCD calculates. While leverage levels have since rebounded somewhat, banks say they still are only underwriting pass credits. How can this be?
Remember that the real Leveraged Lending Guidance test is whether companies can show the ability to repay their debt from base cash flows. Bankers say that more of the companies going private have solid, stable cash flows, and thus can easily show the ability to delever. LCD itself reviewed the 10 largest LBOs of 2015 and observed a more conservative bias. For instance, while 2015 purchase-price multiples climbed above the levels seen in 2006 and 2007, average jumbo LBO debt multiples remain below 2014 levels—and more than a turn below 2006/2007 levels.
Second, the leverage multiples of these jumbo LBOs were corralled in a tight band, between 6-7 times. Indeed, just 5% of 2015’s jumbo LBOs had leverage of at least 7x, versus 15% last year and 30% in 2007. With strong investor demand for assets for much of 2015, a hard(ish) limit suggests the Guidance may be placing a ceiling on leverage.
But while the companies and leverage metrics may be getting more conservative, the agencies argue that the loan structures themselves are getting looser. To this end, the SNC Review notes that 92% of leveraged loans originated after June 2014 have incremental facilities—at the same time covenant restrictions have loosened. According to LCD, 65% of institutional loans issued this year were covenant lite, meaning they have no maintenance covenants.
At the end of the day, it appears that the quality of deals may be improving (as dictated by the Leveraged Lending Guidance), while the structure of the deals may be easing. With the SNC shifting the Guidance restrictions to “softer” targets, it will be interesting to see if 2016 deal structure evolves to accommodate the changing focus. – Meredith Coffey