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US Leveraged Loan Fund Inflow Streak Ends at 14 Weeks

US loan funds

U.S. leveraged loan funds recorded an outflow of $45.4 million in the week ended Nov. 9, according to the Lipper weekly reporters only. This is the first outflow since the week ended July 27, snapping a 14-week run of inflows that totaled $3.87 billion during that period.

The four-week trailing average drops to positive $226.6 million, from $341.8 million last week.

ETF flows were positive, at $53.3 million, against outflows from mutual funds of $98.7 million.

Year-to-date outflows from leveraged loan funds total $1.57 billion, based on outflows of $4.1 billion from mutual funds against inflows of $2.5 billion to ETFs, according to Lipper.

The change due to market conditions this past week was negative $82.5 million, marking the first two-week decline since June. Total assets were $70.62 billion at the end of the observation period. ETFs represent about 16% of the total, at $11.64 billion. — Jon Hemingway

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The Day After, US Leveraged Loan Lose Slight 0.05%

Loans lost 0.05% today after gaining 0.02% yesterday, according to the LCD Daily Loan Index.

The S&P/LSTA US Leveraged Loan 100, which tracks the 100 largest loans in the broader Index, lost 0.07% today.

In the year to date, loans overall have gained 8.35%.

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Europe/Trump: Bankers Optimistic on Primary Issuance as Markets Pare Early Losses

European markets are shrugging off their knee-jerk reaction to Trump’s victory in the U.S. Presidential Election, with many asset classes now starting to pare their early losses.

Credit seems to be slightly outperforming equities, and leveraged finance traders say that while secondary prices were marked down a point or more early in the session, the lack of actual selling has seen prices recover. Moreover, bankers are optimistic that primary activity in Europe will be largely unaffected by the result.

Equity markets reacted fastest and hardest to the news. The Nikkei shed nearly 5.5%, illustrating how bearish the market tone was first thing. The FTSE 100 initially fell more than 100 points, but is now slightly in the green, while the Eurostoxx was down more than 2%, and is now just 1% in the red.

All eyes will now be on the U.S. market open, and here the futures are indicating a sharp move south. The Dow Jones Industrial Average is forecast to open more than 300 points, or roughly 2%, lower (note though, that as reported the futures market was projecting a 400-point fall earlier this morning).

Safe-haven assets meanwhile are seeing their rally fade a little. The Bund yield was five basis points tighter earlier in the session, but is now two basis points tighter, at 17 bps. The gold price is up 2.25%, having been roughly 2.5% higher in early trading.

The iTraxx Crossover is a touch wider than at the open, having now moved out 12 bps to 338, but secondary prices show credit is outperforming equities. Indeed, loan traders across the board say the market opened a little softer, but has now reversed its losses, and there were no forced sellers.

If anything, market participants are frustrated that their hoped-for buying opportunities did not materialize. “Not many sellers are appearing, and we were hoping for some opportunities,” commented one trader. “Some loans were initially down a quarter- to half-point, but quickly got back to where they were, and offers are static because there’s a queue of people looking to buy paper.”

“Loans were half a point down, but are now back to where they were last night,” confirms another market participant. “U.S. equity futures are down, but that was all very short-lived, and now high-yield is back to normal. We are even seeing some investors that have gone in this morning looking for bargains, but are now having to lift offers.”

High-yield secondary players paint a similar picture. “Initially we saw the Street trying to mark prices down, but there has been limited trading at lower levels,” said one buysider. “There is no panic-selling, and everything is very measured and orderly. Prices are coming back now, and any trading is not far off yesterday’s closes as credit outperforms equities. You have to remember too that we have CSPP and CBPS, which limits any widening. Given how muted the market reaction is, it wouldn’t surprise me to see issuance quite soon.”

As for primary, all eyes will now turn to the cross-border loan financing from Genesys, which held bank meetings on Monday and Tuesday, but has deliberately waited for the outcome of the U.S. election to release price guidance. Meanwhile in the bond market Perstorp is also out with a cross-border offering. It is roadshowing until next Monday, and so has plenty of time to gauge the market reaction.

As to whether more new issues will follow, bankers sound fairly confident that just like secondary, concerns will be shrugged off quickly — in the short-term at least. Earnings season may keep a lid on high-yield supply in the near term, while bankers suggest that how rates move in response will be a key factor in year-end supply.

“I don’t think the result has a big impact on the market’s ability to do deals, but the big question will be what happens to rates, as I would expect most pre-year-end issuers to be sensitive to double-Bs and rates,” comments a banker.

Meanwhile loan bankers are optimistic that the near-term pipeline remains in place, but admit it’s too early to truly gauge how supply will impacted. “Generally I agree that the loan pipeline should continue to come through, though I think it’s too early to really tell,” said one banker. “European credit is still well-bid, but we will have to see when the U.S. shows up. I think loan deals can still go ahead, though transactions might require some tweaks to pricing.” — Staff reports

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Amid Demand Surge, Leveraged Loan Secondary Prices Inch Further Above par

leveraged loan break prices
The average price at which U.S. institutional loans entered the trading market hit 100.10% of par in October – the highest level since June 2015 – after finally topping par in September, according to LCD.
The recent rise in leveraged loan prices comes as investors continue to pour money into U.S. loan funds and ETFs, for two main reasons:

  • Investors are looking to take advantage of loans’ floating-rate nature, in the face of what looks to be a Fed rate hike in December
  • Leveraged loans in October were one of the few higher-yielding investments (relatively speaking, anyway). The asset class returned 0.83% in October, easily topping high-yield bonds (0.31%), investment grade bonds (-0.83%), stocks (-1.82%), and 10-year Treasuries (-1.90%)

That investor appetite in the asset class has led bids on loan paper in the secondary market steadily higher since February of this year. – Tim Cross

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Riding Investor Wave, US CLO Market Sees Another $8B Month

CLO issuance

U.S. CLO issuance topped $8 billion in October – the second straight month it’s done so – bringing YTD issuance to $55 billion, according to LCD. The $8.4 billion issued last month is the most since the $13.1 billion in June 2015.

The relative surge in CLOs – the dominant investor in the $866 billion U.S. leveraged loan market – comes as investors have turned to loans of late, in light of slim yields on offer in other markets and in expectation of a December rate hike.

The spread on loans, of course, floats according to LIBOR, meaning the asset class offers interest rate protection, compared to fixed-income markets, such as junk bonds. – Tim Cross

You can learn more about how CLOs work here, in LCD’s free Loan Market Primer.

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US Leveraged Loans Lose 0.08% for 2nd Straight Day

Loans lost 0.08% today after losing 0.08% yesterday, according to the LCD Daily Loan Index.

The S&P/LSTA US Leveraged Loan 100, which tracks the 100 largest loans in the broader Index, lost 0.13% today.

In the year to date, loans overall have gained 8.39%.

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Another Month of Gains for US Leveraged Loan Returns

us loan returns

U.S. leveraged loans gained another 0.83% in October. While that’s down slightly from the 0.86% return in September, it’s the eighth straight monthly advance for the asset class and brings year-to-date returns to a healthy 8.61%, according to LCD.

The 8.61% return for the Index in 2016 marks the strongest performance for the first 10 months of a year since 2009, when the market rebounded by an outsized 46.91%, following historic losses in 2008. In 2015, loans gained a mere 1.25% between January and October.

Looking more closely at October, there was a notable disparity in activity depending on credit quality. Lower-yielding BB loans gained 0.30%, a four-month low, mostly via interest return. Indeed, with 70% of this sub-index already at par or higher there is limited upside, if any.

At the other end of the ratings spectrum, CCC paper advanced 3.43% in October, a five-month high, while D rated paper gained 4.90%, the most for this segment since April. In fact, a majority of October’s biggest advancers consisted of issuers rated CCC or lower. – Marina Lukatsky

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Late to party, Bain targets global middle market strategy for BDC

While no stranger to lending to middle market companies, Bain Capital is a latecomer to the BDC party. Other asset investment firms of its size embraced the structure years ago.

A combination of demand from institutional investors and lessons learned from the lenders that came and went during the credit crisis motivated the wait.

“We haven’t gone for explosive growth,” said Michael Ewald.

Calls for a BDC’s advantageous structure led to the SEC filing of the registration statement for Bain Capital Specialty Finance on Oct. 6. The BDC will invest in middle market companies generating $10 million–150 million in annual earnings, with ones that generate $20–75 million in EBITDA the primary target.

Ones smaller than those, generating $10–20 million in earnings, generally have very health relationships with regional banks, so lending to them is more competitive.

Bain plans to differentiate themselves from the crowded playing field of BDCs that lend to middle market companies by investment choices made for the 30% of assets in non-qualifying investments. Here, Bain aims to target European and Australian companies.

The credit originations team under Ewald reflects this: staff in Melbourne is increasing to four from three, seven people are based in London, and the rest are in New York, Boston, and Chicago.

The previous name of the entity is Sankaty Capital Corp, the filing showed. The BDC will be externally managed by Bain professionals through BCSF Advisors. The BDC’s board consists of David Fubini, Thomas Hough, and Jay Margolis. Investment decisions are made by the committee that governs other Bain Funds, and consists of Jonathan Lavine, Tim Barns, Stuart Davies, Jonathan DeSimone, Alon Avner, Michael Ewald, Christopher Linneman, and Jeff Robinson.

Investor capital at Bain has previously had exposure to the middle market lending asset class through other funds, including a dedicated $400 million direct lending fund raised at the start of 2015. In addition, Bain is currently investing from a $1.5 billion fund targeting junior debt investments at middle market companies, with another $3.5–4 billion targeting senior debt of middle market companies through others types of funds and managed accounts.

The BDC has been investing for about three weeks, and is expected to ramp up fully over one year. Excluding leverage, the size is $546 million. The private BDC has a 3-1/2 year investment period, after which it will be wound down, unless it is listed publicly before then.

Many BDCs in recent years have struggled with shares trading below net asset value, marring fundraising efforts through share sales. Before then, the BDC would need to be fully invested, and grow more, with at least $750 million in equity.

Per Ewald, “There’s potential to take it public, but we’ll figure that out when the time’s appropriate. There haven’t been a lot of BDC IPOs lately, so that might be the bigger news story.” — Abby Latour

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US Leveraged Loan Funds See 13th Straight Week of Cash Inflows

US loan funds

U.S. leveraged loan funds recorded an inflow of $290.6 million in the week ended Oct. 26, according to the Lipper weekly reporters only. This is off the recent pace, down from $514.8 million last week, but it extends the inflow streak to 13 weeks and tops the weekly average during that time of $286 million.

The total inflow during this current streak is $3.72 billion.

The four-week trailing average dropped to positive $413.2 million, from $460.7 million last week.

ETF flows were positive, at $43.7 million, or 15% of the total, which is the lowest rate amid this current win streak.

Year-to-date outflows from leveraged loan funds total $1.67 billion, based on outflows of $4.02 billion from mutual funds against inflows of $2.35 billion to ETFs, according to Lipper.

The change due to market conditions this past week was positive $72.2 million, or 0.11% of total assets. Total assets were $70.75 billion at the end of the observation period. ETFs represent about 16% of the total, at $11.5 billion. — Jon Hemingway

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Leveraged Loans: As Investors Pour Cash into Market Demand Swamps Supply

loan technicals

The U.S. leveraged loan market continued to favor issuers in September, with demand for paper topping supply by $9.1 billion, according to LCD. While that’s down from the whopping $12.1 billion imbalance in August it’s up from a still-hefty $6.5 billion in July.

As a result of this three-month technical tilt, the September loan market was set firmly in overdrive, leading to outsized activity across many corners of the asset class, including institutional issuance (which hit a record high), high-yielding recap/dividend deals (the $6.9 billion in September was the most since July 2015), and even CLOs, a crucial leveraged loan investor constituency that has been largely dormant for much of 2016.

Why the supply/demand imbalance? Investors hungry for yield – and paper – have been pouring cash into U.S. loan funds, and CLO issuance had its busiest month of the year, as that market looks to price deals before new regulations hit at year-end. – Tim Cross

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