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Repayments on European Leveraged Loans Hit 3-Year Low

european leveraged loan repayments

Repayments out of the S&P European Leveraged Loan Index (ELLI) fell to just €86 million in January – down from €1.3 billion in December, and the lowest monthly amount in more than three years.

As a result the rolling three-month repayment rate declined to 3.6%, from 7% in the fourth quarter, based on €3.2 billion of loans repaid in the last three months.

The ELLI did not track any full paydowns in the first month of 2016, resulting in a very low repayment tally. – Staff Reports

This story first appeared on www.lcdcomps.com, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here

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US Leveraged Loan Default Rate Creeps to 1.37%, Courtesy Noranda

leveraged loan default rate

The default rate of the S&P/LSTA Leveraged Loan Index inched to 1.37% by principal amount, from 1.33% at the end of January, after Noranda Aluminum filed for Chapter 11 on Feb. 8.

Citing challenging market conditions for the aluminum industry Noranda filed for Chapter 11 in the U.S. Bankruptcy Court for the Eastern District of Missouri.

Though not a large default—there was about $467 million outstanding under Noranda’s TLB as of Sept. 30, SEC filings show—Noranda is the fifth S&P/LSTA Index issuer to default this year, following defaults from The Sports Authority,Verso/NewPage, Arch Coal and RCS Capital in January.

The loan default rate is expected to remain below trend in 2016, before creeping up to the historical average of 3.2% by the end of 2017. Indeed, managers on average say that the loan default rate by amount will climb to 2.35% by year-end 2016 and to 3.24% by year-end 2017, according to LCD’s latest quarterly buyside survey conducted in early December. – Kerry Kantin/Steve Miller

This story first appeared on www.lcdcomps.com, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here

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CLO Sighting: BlackRock Prices €410M Vehicle in European Market Debut

Credit Suisse has priced the €410.238 million CLO for BlackRock Investment Management (UK) Limited, according to market sources. The transaction is the manager’s first European CLO, and is the first to price in Europe in more than three weeks.

The structure has been revised since launch, with the single-B rated tranche removed. Discount margins were not released.

The revised structure runs as follows:

The closing date is Feb. 24, 2016, and the first payment date is Sept. 15, 2016. The legal final maturity is March 15, 2029. During the marketing phase, the non-call period was guided as roughly two years, and the reinvestment period as roughly four years.

For risk retention, the manager intends to retain a 5% vertical slice as sponsor. BlackRock Investment Management (UK) Limited is a MiFID registered entity.

For Volcker, the transaction will rely on Rule 3a-7, while the Class A, B, C, and D notes will also be issued in the form of CM removal and replacement non-voting notes or CM removal and replacement exchangeable non-voting notes, in respect of any CM removal resolution or CM replacement resolution.

This is the first European CLO to price in February, and BlackRock’s transaction takes the year-to-date tally to €0.82 billion from two transactions, according to LCD. — Sarah Husband

Follow Sarah on Twitter for CLO market news and insights.

This story first appeared on www.lcdcomps.com, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.

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Leveraged Loans: Jurisdiction, Credit Risk at Heart of LSTA/SEC CLO Suit

A ruling on the LSTA’s suit against regulators over CLO risk retention may not be reached until just before the regulation is due to go into effect on December 24.

Much will depend on which court has the jurisdiction to hear the suit, a topic that was heavily debated at last Friday’s oral arguments at the D.C. Appeals Court.

If the appeals court has jurisdiction, a ruling could be expected by June or July, but it’s also possible that the case gets transferred to the lower D.C. District Court, pushing any ruling very close to the December 24 deadline.

In that latter scenario, the LSTA would likely try to speed things along, requesting an expedited hearing in addition to negotiating with the government to use the same briefs that were submitted to the appeals court to save time, but nonetheless another date would have to be set in the district court for oral arguments.

Adding to the timeline is the likelihood that the decision in the district court would be appealed regardless. The case would then return to the appeals court where a different panel of judges would ultimately rule on the merits.

The LSTA could also ask for a stay of the final rule from the judge, meaning that the deadline for CLO managers to comply with risk retention would not go into effect until the case is decided in the appeals court.

Friday’s developments mean that any relief for the CLO market around risk retention remains a long shot, but there was at least some encouragement that the justices on Friday seemed open to some of the LSTA’s arguments.

To recap, the LSTA is challenging the Federal Reserve and Securities and Exchange Commission (SEC) on three fronts related to the 5% retention requirement in December.

The LSTA argues that the regulators are misinterpreting the definition of a “securitizer,” not properly defining “credit risk,” and failing to consider potential alternatives such as the Qualified CLO.

If the courts rule that CLO managers are not “securitizers,” CLOs would likely be exempt from risk retention, while a ruling that the regulators failed to either properly define credit risk or consider alternatives would mean regulators may have to re-propose risk retention.

When the lawyer for the Federal Reserve explained the securitization process of CLOs and how the risk is transferred from the balance sheets of the banks to CLO investors, a judge asked, “but you weren’t saying these risky loans were ever on the balance sheet of the manager, right?” To which the Fed’s lawyer replied, “They never put them on their balance sheet your honor, that is correct.”

Thus supporting the LSTA’s argument that the CLO manager is not a “securitizer” because it has no ownership, possession, or control of the underlying loans assets when they are purchased and put into a special purpose vehicle (SPV).

The definition of credit risk was prominently debated in the latter part of the hearing. The LSTA argues that the government is under obligation to explain its rulemaking, and the agencies fail to clearly define credit risk, using only the term “fair value.” And while CLO managers can comply with the 5% risk-retention rule through a vertical slice, horizontal slice, or a mix of both, justices acknowledged their awareness that the horizontal tranche is composed entirely of the “first-loss” piece. Lawyers for the LSTA pointed out that the same 5% held in a vertical slice has a different risk profile because almost 80% (the AAA tranche) has very little credit risk.

While one of the judges appeared sympathetic to the LSTA’s argument on credit risk, another seemed to suggest that the government may have met its burden by proposing the 5% vertical slice.

The audio of Friday’s hearing hearing can be found here.

The case is The Loan Syndications & Trading Association v. SEC, 14-1240, U.S. Court of Appeals, District of Columbia Circuit (Washington). — Andrew Park

Follow Andrew on Twitter for CLO market news and insights. 

This story first appeared on www.lcdcomps.com, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here

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Sign of the Times: Where do Endownments/Foundations See 2016 Opportunity: Distressed Debt

2016 opportunities

Endowments and foundations generally are pessimistic about the 2016 economic environment, though they do see a few potential bright spots. Chief among them: Distressed debt.

“Investors believe there are opportunities for return in select asset classes for those willing to move quickly and look past short-term noise,” said Cathy Konicki, head of the NEPC’s endowment and foundation practice group. The NEPC is consulting firm that conducting a survey of endowments/foundations, on which the above responses are based. – Staff reports

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Leveraged Loans: Amid Global Volatility, CLO Market Players Stranded on Sidelines

 

global CLO issuance

It’s not getting any better out there for U.S. and European CLO markets, and with liability spreads continuing to gap out each week, some are speaking in terms of the primary market becoming dysfunctional. The stats say it all, with just $1.28 billion pricing globally this year versus $9.24 billion in the same period last year, according to S&P Capital IQ LCD.

Managers are marketing transactions in both regions, but with the ongoing volatility and the need to reduce fees on those investing in the CLO equity portion, few managers are actually able to price a CLO. Those that can are waiting for conditions to improve. Others with warehouses that are well ramped may be under increasing pressure to act.

Unsurprisingly, no transactions priced on either side of the Atlantic last week. – Sarah Husband/Andrew Park

Year-to-date volume:

  • U.S. – $830 million from two deals versus $6.95 billion from 13 deals in the same period last year
  • Europe – €410 million from one deal versus €560 million from one CLO in the same period last year
  • Global – $1.28 billion from three deals versus $9.24 billion from 17 deals in the same period last year

This story first appeared on www.lcdcomps.com, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here

Follow Sarah on Twitter for CLO market news and insights. 

Follow Andrew on Twitter for CLO market news and insights. 

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As Investors Shun Risk, Leveraged Loan Issuers Begin to Forego Covenant-Lite Deals

loans adding covenants

Amid the current risk-averse investor market, reverse-flexes on leveraged loans – where pricing or fees are sweetened during the marketing process in order to complete syndication of the deal – have been on the rise.

Digging deeper into the flex data, no fewer than three loans were flexed to include a maintenance test in January, or 19% of January’s class of ‘covenant-lite’ launches, compared to just 2.9% in 2015. All the same, covenant-lite loans remain the dominant structure for new institutional loans, accounting for 60% of new launches in January. – Staff reports

This story first appeared on www.lcdcomps.com, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here

You can read more about how covenant-lite loans are structured here, in LCD’s Leveraged Loan Market Primer/Almanac (it’s free).

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European leveraged loans gain 0.17% on Friday; YTD return: 0.18%

ELLI Daily 2016-02-08

The European Leveraged Loan Index (ELLI) gained 0.17% on Friday (excluding currency). The ELLI has returned 0.06% thus far in February. The total return for the ELLI in the year to date is 0.18%.

In contrast, the U.S. leveraged loan market has returned -0.72% so far in 2016. — Staff reports

This story first appeared on www.lcdcomps.com, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here

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European Leveraged Loan Default Rate Dips to 1.4%, From 2.1%

european leveraged loan default rate

The European leveraged loan default rate hit a low 1.4% in January, down from 2.1% in December. In the 12 months ended Jan. 31, the European Leveraged Loan Default Index tracked €1.2 billion of institutional loan defaults and restructurings, down from €2 billion at the end of the prior month. – Staff reports

This story first appeared on www.lcdcomps.com, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here

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Gladstone restructures loans in Galaxy Tool, Tread; sells Funko

Gladstone Investment Corporation has restructured investments in Galaxy Tool and Tread Corp. in the recent fiscal quarter, exchanging debt holdings for equity, an SEC filing showed.

Gladstone Investment booked a realized loss of $10.5 million when the lender restructured its investment in Galaxy Tool. Debt to Galaxy Tool with a cost basis of $10.5 million was converted into preferred equity with a cost basis and fair value of zero through the restructuring transaction, the SEC filing showed.

Galaxy Tool, based in Winfield, Kan., manufactures tooling, precision components, and molds for the aerospace and plastics industries.

An investment in Tread included debt with a cost basis of $9.26 million. This was also converted into preferred equity. Gladstone Investment realized a loss of $8.6 million through the transaction.

Tread was Gladstone Investment’s sole non-accrual investment as of Sept. 30. As of Dec. 31, 2015, a revolving line of credit to Tread remained on non-accrual. Tread remains Gladstone Investment’s sole non-accrual investment.

Based in Roanoke, Va., Tread manufactures explosives-handling equipment including bulk loading trucks, storage bids, and aftermarket parts.

Also in the quarter, Gladstone Investment sold an investment in bobblehead and toy maker Funko, realizing a gain of $17 million. Gladstone Investment received cash of $14.8 million and full repayment of $9.5 million in debt as part of the sale.

Gladstone Investment Corporation, based in McLean, Va., is an externally managed business development company that trades on the Nasdaq under the ticker GAIN. The BDC aims for significant equity investments, alongside debt, of small and mid-sized U.S. companies as part of acquisitions, changes in control, and recapitalizations. — Abby Latour

Follow Abby on Twitter @abbynyhk for middle-market deals, leveraged M&A, BDCs, distressed debt, private equity, and more.