content

Loan outflows continue for fifth week, led again by mutual funds

Loan funds reported outflows of $365 million for the week ended July 1, more than double the $174 million of outflows for the week ended June 24, according to Lipper. It was the fifth straight week of outflows for a combined $1.2 billion, which follows a stretch of three consecutive weeks of inflows that totaled $442 million.

Mutual funds again provided the majority of the latest outflow, at $271 million, compared to $93 million of ETF outflows. Last week, mutual funds reported outflows of $151 million, joined by $23 million in ETF outflows.

With today’s outflow, the trailing four-week average widens to negative $268 million, from negative $201 million last week, and negative $147 million two weeks ago.

The year-to-date outflow is $4.1 billion, with 4% tied to ETFs, versus an inflow of $1.2 billion at this point last year, with positive 70% tied to ETFs.

In today’s report, the change due to market conditions was $98 million, or roughly 0.11% against total assets, which were $93 billion at the end of the observation period. The ETF segment comprises $6.7 billion of the total, or approximately 7% of the sum. – Joy Ferguson

Loan Fund Flows July 6 2015

content

CLO roundup: Greek cloud hangs over Europe; US prints eight deals

Having already paused activity last week, Greece’s debt problems now threaten to curtail new-issue CLO activity for the rest of the summer in Europe after yesterday’s rejection of austerity measures. It also remains to be seen whether the U.S. market will lose its momentum after last week’s bonanza that saw eight deals print stateside.

Global CLO volume Jul 3 2015

 

Year-to-date statistics are as follows:

• Global issuance totals $68.38 billion.
• U.S. issuance totals $59.96 billion from 113 deals, versus $64.01 billion from 119 deals during the same period last year.
• European issuance totals €7.56 billion from 19 deals, versus €6.92 billion from 16 deals during the same period last year.  – Sarah Husband

 

content

High yield bond, loan markets in Europe largely resilient to Greek ‘No’ vote

Despite a resounding ‘No’ vote in the Greek referendum, which saw the country’s people vote against further austerity, the reaction in European loan and bond markets has largely been orderly and contained. The vote has however ushered in a further period of political uncertainty and economic volatility in Europe, with issuers having to wait and see how the situation develops before coming to market with new deals.

In the aftermath of the vote, Greek finance minister Yanis Varoufakis resigned. His replacement will be instrumental in the talks that will now ensue as Greece grapples with how to maintain liquidity in its banking system, and the EU ponders how to prevent (or in a worst-case scenario, manage) the country’s exit from the euro. There is much at stake, with concerns that despite stringent capital controls instigated last week, ATMs across the country may soon run out of cash.

The market’s reaction today was more muted than a week ago when the referendum was announced, with the iTraxx crossover widening by 15 points this morning to 342, and the FTSE 100 and Eurostoxx 50 shedding roughly 42 points and 58 points, respectively. “The market doesn’t seem to care. It’s less of an event than last Monday, after Tspiras called for the referendum. Even euro/dollar is not doing much,” said one investor.

The sovereign bond market followed suit, with 10-year yields on government paper from Italy, Spain, and Portugal widening by 11-14 bps. Greek 10-year bonds widened by 257 bps. Meanwhile the 10-year Bund yield tightened by five basis points, to 74.

High-yield corporates slipped 0.5-2 points across the board in early trading, while Greek-related names were more heavily hit.PPC’s 4.75% notes due 2017 were the biggest losers, down nine points, while Hellenic Petroleum’s 8% notes due 2017 fell seven points. OTE bonds, often a proxy for sovereign risk during a crisis, were also hit – the borrower’s 7.875% notes due 2018 fell six points, while its 3.5% notes due 2020 fell five points.

Loan markets have also been hampered by the volatility, and are likely to remain moribund as issuers wait to see how the Greek situation plays out. “We’ll be gazing at our navels for the next few weeks,” said one arranger. “We can’t post on pricing. There is a market, but we don’t know where it is. The market’s not closed, because there are buyers – there just aren’t any sellers. Why would anybody issue in this market?”

There are investors out there with cash, and there are also several deals ready to launch, the largest of which is the LBO financing for glass-bottle business Verallia, which is expected to total roughly €2 billion of loans and bonds. The transaction, led by BNP Paribas, Credit Suisse, Deutsche Bank, Nomura, Société Générale CIB, and UBS, was understood to be ready to launch if the Greeks had voted ‘Yes’ in the referendum, and the arrangers could still look to de-risk via an early bird phase among select lenders, rather than be on risk for the entire financing over what could be a volatile summer.

The lack of visibility may also affect the launch of expected deals from GFKL Financial Services and Motor Fuel Group, which sources say has been shown to investors already.

In bonds, DufrySynlabs, and Center Parcs remain in the pipeline, while pre-marketing took place for a small U.K. company last week, sources said.

In the CLO market, hopes that a ‘Yes’ vote would offer a window of opportunity for those looking to price transactions ahead of the summer lull were dashed by the results of yesterday’s poll, and arrangers and investors are now busy collating investor feedback, and assessing appetite and likely price levels. However, the ‘No’ vote means new-issue activity could now be on hold until September. Carlyle via Citi, and Pramerica via Credit Suisse were among those looking to price imminently, with another handful behind them, sources say.

As reported last week, this situation may or may not be a problem for CLO managers with warehouses open – depending on the make-up of that warehouse and the future direction of the secondary market. Any significant sell off in secondary in the coming weeks raises the potential for warehouses to go underwater, but a warehouse comprising mostly primary assets bought at par or a discount will be better able to withstand secondary weakness than one constructed via secondary market purchases at par and above. Indeed for those starting to ramp new transactions, the current conditions – a mix of better M&A loan supply, a halt in repricings and spread compression, and volatility – may be ideal in terms of generating a strong equity performance. – Staff reports

content

JW Resources, backed by HIG Capital affiliate, files Chapter 11

Kentucky coal producer JW Resources, backed by an affiliate of HIG Capital, filed for bankruptcy intending to sell assets through a 363 sale.

The filing was in the U.S. Bankruptcy Court for the Eastern District of Kentucky on June 30.

The filing listed debt of $50-100 million. The secured lenders to the company are GB Credit Partners and Bayside JW Resources.

In March 2014, middle market lender GB Credit Partners, the investment management operation of Gordon Brothers Group, provided a $15 million term loan and revolver to JW Resources. Proceeds funded working capital.

The company blamed the bankruptcy on a 26% drop in coal prices through April 2015, higher mining and processing costs due to government regulations, and declining demand for coal. The company failed to find more funding from secured lenders, equityholders, or third parties.

JW Resources hired Energy Ventures Analysis (EVA) as investment bankers to help carry out the sale through an open auction process.

Bayside Capital is the majority owner of JW Resources, with an equity holding of 74.4%, court filings showed. Investment firm Bayside Capital is an affiliate of HIG Capital and provides debt and equity investments to middle-market companies.

JW Resources produces mines coal with mineral reserves in the Central Appalachian regions of Kentucky. JW Resources acquired its assets and business operations from Xinergy Corp. in February 2013. – Abby Latour

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

content

With blemish-free June, leveraged loan default rate ticks to 1.24%, well within historical lows

leveraged loan default rate

June’s leveraged loan default rates stand well inside the historical averages of 3.2% by amount and 2.9% by number.

Looking ahead, managers who took part in LCD’s latest buy-side poll from early June predicted that the default rate by amount will inch higher by the end of 2015, before topping 2% by June 2016, mainly as a result of woes in the coal sector and the increase in loans trading at distressed levels. – Steve Miller

Follow Steve on Twitter for leveraged loan news and insights.

This analysis is part of a longer LCD News story, available to subscribers here.

content

With all eyes on Greece, Leveraged loans lose 0.42% in June; 1st setback of 2015

leveraged loan returns

 

In June, S&P/LSTA Index returns slipped into the red, at negative 0.42%, amid heavier conditions that prevailed for most of the month and recent concerns surrounding Greece that put pressure on all risk assets.

It was the first monthly setback of the year and followed a 0.19% gain in May. The largest loans that constitute the S&P/LSTA Loan 100 lagged the broader market with a 0.86% loss in June.

This group suffered disproportionately from Millennium Health’s outsized decline and from falling prices in the market’s two big distressed situations: Energy Future Holdings and Caesars. – Steve Miller

Follow Steve on Twitter for leveraged loan news and insights.

content

BDCs head to Washington to make case to modernize rules

In 2013, Rep. Mick Mulvaney (R-SC) toured the factory of Ajax Rolled Ring and Machine which manufactures steel rings used in construction equipment and power turbines.

The factory, which is located in York, S.C., now employs about 100 people. It has since been acquired by FOMAS Group.

But at the time of Mulvaney’s tour, Ajax was controlled by Prospect Capital, a business development company, or a BDC. Propsect Capital’s investment from April 2008 included a $22 million loan and $11.5 million of subordinated term debt.

Mulvaney said he had never heard of a BDC before that day at Ajax, nor realized how important BDCs were as an investment source in his district.

That has changed. Bringing laws for BDCs up-to-date has since become a key issue for Mulvaney, who is on the House Committee on Financial Services. He has proposed a draft bill to modernize the laws governing BDCs.

As a former small business owner himself, Mulvaney believes allowing BDCs to grow more easily, a key component of his proposed legislation, will provide much-needed financing to the mid-sized companies to which banks have cut lending since the credit crisis.

“BDCs fill a niche for companies too big to access their local banks, but too small to access public debt and equity markets. I am acutely aware of the importance of having capital for growth when you are running a company,” Mulvaney said.

Last week, the modernization of the laws governing BDCs was the subject of a hearing by the House Subcommittee on Capital Markets and Government Sponsored Enterprises. The hearing brought together titans of the BDC industry.

“The BDC industry is maturing, and growing in a meaningful way. They are beginning to realize they need to come together as a regulated industry and speak with a common voice,” said Brett Palmer, President of the Small Business Investor Alliance (SBIA).

“They are incredibly competitive, which is one of the challenges of getting them all in the same regulatory boat, rowing in the same direction.”

The timing of Prospect Capital’s purchase of Ajax Rolled Ring in April 2008 was not fortuitous. The company was heavily reliant on Caterpillar, which accounted for roughly 50% of revenue, and the global financial crisis took a heavy toll on Ajax in 2009 and 2010.

Still, Prospect Capital increased its investment in Ajax during those tough years. That investment allowed Ajax to build a machine shop, and thus deliver a more finished product to its customers. Last year, when Italy-based FOMAS unveiled an offer for Ajax in a bid to expand in the U.S. market, Ajax was a much stronger business with revenue diversified away from Caterpillar, according to Prospect Capital.

Rep. Mulvaney is hoping a bill could be ready at the end of July, and that it could be on the floor for debate by fall. The new draft of the bill addresses concerns raised over a prior proposal to reform BDC rules.

One size does not fit all
The SBIA estimated the number of active BDCs exceeds 80, and the size of the rapidly growing industry has surpassed $70 billion. “What’s a priority for one BDC is not necessarily a priority for another,” SBIA’s Palmer said.

Even with differences across the industry, possibly the most important potential change for BDCs is the asset coverage requirement. The change would effectively raise the leverage limit to a 2:1 debt-to-equity ratio, from the current 1:1 limit.

BDC managers argue that even with the change, leverage of BDCs would be conservative compared to other lenders, which can reach a level of 15:1, for banks, and even higher, to the low-20x, for hedge funds.

“It should allow BDCs to invest in lower-yielding, lower-risk assets that don’t currently fit their economic model,” Ares Capital Board Co-Chairman Michael Arougheti told the hearing. “In fact, the current asset coverage test actually forces BDCs to invest in riskier, higher-yielding securities in order to meet the dividend requirements of their shareholders.”

BDC managers say that BDCs are far more transparent than banks traditionally have been. After all, BDCs regularly publish their loans, as well as the loans’ interest rates and fair values, in quarterly disclosures with the Securities and Exchange Commission.

“We believe it would be good public policy to increase the lending capacity of BDCs, and promote the more heavily regulated, and more transparent, BDC model,” said Mike Gerber, an executive vice president at Franklin Square Capital Partners.

To garner support for the leverage change, the bill may require BDCs to give as much as a year’s notice for any increase, allowing shareholders to sell holdings before any change comes into effect, if they don’t approve.

However, the idea of “increasing leverage” has suffered a tarnished image with the public since the credit bubble and resulting global financial crisis. BDCs are popular with retail investors because of their high dividends.

Testimony of Professor J. Robert Brown, who was a Democratic witness at the June 16 hearing on BDC laws, could help repair this image problem, supporters of the change say. Brown said reducing the asset coverage for senior securities was an “appropriate” move toward giving BDCs more fundraising capacity.

“Such a change will potentially increase the risks associated with a BDC. Nonetheless, this is one area where adequate disclosure to investors appears to be a reasonable method of addressing the concern,” Brown’s published testimony said.

“In addition, the draft legislative proposal provides investors with an opportunity to exit the company before the new limits become applicable.”

Save paper
Another change under discussion is the definition of  “eligible portfolio company,” which dictates what type of companies BDCs can invest in.

BDCs were designed to furnish small developing and financially troubled businesses with capital. Existing rules dictate that BDCs invest at least 70% of total assets into “eligible portfolio companies,” leaving out many financial companies.

Some argue that the economy has changed since this BDC rule was put in place, moving away from traditional manufacturing companies.

“Changing the definition of eligible portfolio company to permit increased investment in financial firms may result in a reduction in the funds available to operating companies. It may also result in an increase in the cost of funds to operating companies,” Brown said in his published testimony.

Less controversial in a potential BDC modernization bill appears to be the desire to ease regulatory burdens for BDCs.

Main Street Capital CEO Vincent Foster drew attention to the SEC filing requirements born by even the smallest BDCs. He called for reform to the offering and registration rules, such as allowing BDCs to use “incorporation by reference” that would allow them to cite previous filings instead of repeating information in a new SEC filing. He said the change would not diminish investor protections.

By way of example, Foster held up a stack of papers at the hearing on the BDC bill, about four inches thick, that was needed by Main Street to issue $1.5 billion in stock. He then held up a stack of papers, less than one inch thick, needed by CIT, not a BDC, to allow for a $50 billion equity issuance.

“Do four more inches of paper protect better than a half an inch? Hundreds of pages represent wasted money and manpower,” Foster said.

“This discussion draft would fix this absurdity and make a host of clearly-needed reforms.” – Abby Latour

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

content

Energy sector, Colt Defense focus of LCD’s Restructuring Watchlist

The beleaguered energy sector dominated activity this quarter on LCD’s Restructuring Watchlist, with Sabine Oil & Gas missing an interest payment on a bond and Hercules Offshore striking a deal with bondholders for a prepackaged bankruptcy.

Another high-profile bankruptcy this month was the Chapter 11 filing of gunmaker Colt Defense. Colt’s sponsor, Sciens Capital Management, agreed to act as a stalking-horse bidder in a proposed Section 363 asset sale. The bid comprises Sciens’ assumption of a $72.9 million term loan, a $35 million senior secured loan, and a $20 million DIP, and other liabilities.

The missed bond interest payment for Sabine Oil & Gas was due to holders of $578 million left outstanding of Forest Oil 7.25% notes due 2019, assumed through a merger of the two companies late last year.

The skipped payment comes after a host of other problems. Sabine Oil has already been determined to have committed a “failure to pay” event by the International Swaps and Derivatives Association, and will head to a credit-default-swap auction. The determination by ISDA is related to previously skipped interest on a $700 million second-lien term loan due 2018 (L+750, 1.25% LIBOR floor).

Meantime, Hercules Offshore on June 17 announced it entered a restructuring agreement with a steering group of bondholders over a Chapter 11 reorganization. The agreement was with holders of roughly 67% of its10.25% notes due 2019; the 8.75% notes due 2021; the 7.5% notes due 2021; and the 6.75% notes due 2022, which total $1.2 billion.

Among other developments for energy companies, Saratoga Resources filed for Chapter 11 for a second time, blaming challenges in field operations, the decline in oil and gas prices, and an unexpected arbitration award against the company. Thus, Saratoga Resources has been removed from the list. Another company previously on the Watchlist, American Eagle Energy, has been removed following a Chapter 11 filing in May.

Another energy company, American Energy-Woodford, could work itself off the Watchlist through a refinancing. On June 8, the company said 96% of holders of a $350 million issue of 9% notes due 2022, the company’s sole bond issue, have accepted an offer to swap into new PIK notes.

Also, eyes are on Walter Energy. The company opted to use a 30-day grace period under 9.875% notes due 2020 for an interest payment due on June 15.

Another energy company removed from the Watchlist was Connacher Oil and Gas. The Canadian oil sands company completed a restructuring in May under which bondholders received equity. The restructuring included an exchange of C$1 billion of debt for common shares, including interest. A first-lien term loan agreement from May 2014 was amended to allow for loans of $24.8 million to replace an existing revolver. A first-lien L+600 (1% floor) term loan, dating from May 2014, was left in place. Credit Suisse is administrative agent.

Away from the energy sector, troubles deepened for rare-earths miner Molycorp. The company skipped a $32.5 million interest payment owed to bondholders on a $650 million issue of first-lien notes. Restructuring negotiations are ongoing as the company uses a 30-day grace period to potentially make the payment.

In other news, Standard & Poor’s downgraded the Tunica-Biloxi Gaming Authority to D, from CCC, following a skipped interest payment on $150 million of 9% notes due 2015. Roughly $7 million was due to bondholders on May 15, and the notes were also cut to D, from CCC with a negative outlook. The company operates the Paragon Casino in Louisiana.

Constituents occasionally escape the Watchlist due to improving operational trends. Bonds backing J. C. Penney advanced in May after the retailer reported better-than-expected quarterly earnings and improved sales.

In another positive development, debt backing play and music franchise Gymboree advanced after the retailer reported steady first-quarter sales and earnings that beat forecasts. Similarly, debt backing Rue 21 gained in May after the teen-fashion retailer privately reported financial results, according to sources. – Abby Latour

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

Here is the full Watchlist, which is updated weekly by LCD (Watchlist is compiled by Matthew Fuller):

Watchlist 2Q June 2015

 

content

Leveraged loan fund assets inch higher in May but remain down YTD

leveraged loan fund aum

In May, loan mutual funds’ assets under management inched up $504 million, or 0.37%, to $138.5 billion, according to data from Lipper FMI and public filings. The gain follows a $607 million advance in April. Despite these modest gains, AUM was still down $2.8 billion at the end of May from $141.3 billion at the end of 2014.

As the chart above illustrates, a punishing nine-month run in which AUM declines averaged $3.8 billion a month came to an end in January. In the four months since, AUM is up by an average of $457 million a month. – Steve Miller

Follow Steve on Twitter for leveraged loan market news and insights.

content

Ares forms new middle-market lending venture with AIG-backed Varagon

Ares Capital Corporation has named Varagon Capital Partners, which is backed by insurer AIG, as its new partner for middle-market lending.

The new joint venture, called the SDLP (Senior Secured Loan Program), will originate and hold first-lien loans, including stretch senior and unitranche loans, of up to $300 million, a joint Ares-Varagon statement today said.

“The SDLP will work to follow on with the success that Ares Capital enjoyed with its previous senior loan joint venture, the Senior Secured Loan Program (SSLP), with GE Capital… The program will provide sponsors and management teams with continued access to flexible capital with speed and certainty and without syndication requirements,” the statement said.

“As a long-term investor, AIG is attracted to the strong investment fundamentals of middle-market credit,” said Brian Schreiber, AIG’s Chief Strategy Officer, in the statement.

The fate of Ares Capital’s venture with its former partner, GE Capital, had been in question. The two companies cooperated on the $9.6 billion SSLP venture, with Ares supplying 20% of funding, and GE 80%. Financial details of the new venture were not given.

General Electric announced this month it would sell Antares Capital to Canada Pension Plan Investment Board (CPPIB) and focus on its core industrial businesses. GE Antares specializes in middle-market lending to private-equity backed transactions, but it was unclear if Ares and CPPIB would work together longer term.

Ares has been working with potential parties on a new venture, including non-U.S. regulated banks and non-banks such as asset managers, insurance companies, and combinations thereof. However, there is no guarantee Ares will reach a deal.

Varagon, a direct lending platform to middle-market companies, was formed in 2013. It is backed by AIG and affiliates of Oak Hill Capital Management.

Ares Capital is a BDC that trades on the Nasdaq under the symbol ARCC and invests in debt and equity of private middle-market companies. A subsidiary of Ares Management, which trades on the New York Stock Exchange as ARES, manages Ares Capital.

LCD defines middle-market lending as lending to companies that generate annual EBITDA of $50 million or less, or involving deals of $350 million or less in size, although definitions vary among lenders. – Abby Latour

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