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European Leveraged Loan Primary Market Stoic in Face of Brexit

While European leveraged loan players have been stunned by Brexit, the U.K.’s decision to leave the European Union on Thursday, there is a sense of stoic pragmatism that the market will remain relatively stable over the coming few months. For the moment though, participants have spent the morning trying to get some clarity amid turbulence in wider markets.

“This is not a great day to be able to take a balanced perspective,” said one banker. “We need to take at least the weekend to see the wider issues, but it’s too early yet.”

european leveraged loan returns

European leveraged loan returns

Although equity markets have plunged this morning — and sterling has dipped to its lowest level against the dollar in more than 30 years — in the loan secondary market bids are off only 1.5–3 points, though sources note the full impact of the referendum result has not yet been felt here.

“There are still names out there in the secondary market trading at par, and there are still buyers out there buying,” said one banker. “At the moment this is an FX story, but it’s not yet a loan market story — that won’t emerge for the next few weeks.”

Others agree that the loan market will hold its nerve in the coming few weeks, but that more time will be needed to get a full view of the prospects for new issuance and investor appetite. “We will find stability, it’s just a question of when,” said a senior banker in London. “Deals will get done. There’s not a huge market dislocation, we just have to take this day by day.”

In the immediate future though, a raft of potential opportunistic transactions that had been lined up to be launched last week has already been shelved. A number of sponsors were said to have been waiting until after the voting results to officially sign up for and mandate opportunistic deals, but arrangers say those deals that had been prepared are being put back into cold storage.

“We discussed an opportunistic refinancing yesterday,” said one banker. “That’s off the table, of course, as it was subject to an acceptable [Remain] outcome to the referendum. There were a lot of opportunistic issuers that wanted to benefit from the momentum in the market post-referendum. They were anticipating that Monday would be a very bullish day, and would be the right time to tap the market.”

But while opportunistic transactions are off the table, market participants are stoic, and remain hopeful that the European leveraged loan market will remain stable in the longer term. “There won’t be any dividend recaps launched today, but the market will recover,” said one investor in London. “People will still want yielding assets.”

Another fund manager agrees: “In the cold light of day, it is a long runway to anything actually happening. The uncertainty doesn’t help, but I don’t see a vast impact on earnings profiles.”

Others sources agree that in the long term, the loan market remains a stable option for investors and issuers, and that new-money transactions that are well-structured and positively priced will continue to get traction. In recent weeks, some arrangers are understood to have negotiated slightly better terms on their economic flex to help address the risk of a Leave vote, but it’s too early to know whether there will be a marked change in clearing yields.

Market participants are optimistic that new deals will soon come to the market to test appetite, although sources note that smaller transactions that rely on European commercial bank support will likely be easier territory than those that rely on institutional demand, given the potential distraction of relative-value plays elsewhere.

“The big picture will be that the wider markets are going to be very volatile,” said one account manager. “But at a micro level, the question is simply whether you want to lend to a company or not. There will be no real impact on European-only businesses.”

With only €1.75 billion of volume (of which €950 million is institutional debt) in the forward calendar, according to LCD, an offering of S&P Global Market Intelligence, there are few deals that have been pencilled in to face the new market paradigm in the coming few weeks.

The two largest deals in the pipeline are the financing backing the acquisition of Bilfinger B&F by EQT, and the senior and second-lien financing package to support Partners Group’s takeover of Foncia. The latter provides services for the residential real-estate market and is regarded as a strongly French prospect, while Bilfinger Building and Facility operates in Germany, Austria, and Switzerland, but also has operations in the U.K.
Following these deals, the auctions now out in the market could be more impacted by the Brexit vote, if sponsors become uncertain over valuations or financing costs, leading to deadlines being extended. “There are auctions coming through with deadlines in the next couple of weeks,” said one banker. “Will we want to hold people to that? I expect the market to be more pragmatic than that.” — Nina Flitman

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US Leveraged Loans Gain 0.04%; YTD Return: 4.76%

Loans gained 0.04% 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, gained 0.07% today.

In the year to date, loans overall have gained 4.76%.

Daily loan index 2016-06-23

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In Renewed Push for Aggressive Leveraged Loans, Most-Favored-Nation Sunsets Still Rankle

Emboldened by strong technical conditions in the second quarter, U.S. leveraged loan issuers are asking for more aggressive covenant terms, along with tighter interest rates and new-issue discounts.

They are also pressing again for something called most-favored-nation sunset provisions. According to Covenant Review, the share of issuers seeking an MFN sunset provision over the past month has spiked to 43%, or 12 of 28 transactions the firm reviewed, from 21% earlier in the year.

In the leveraged loan market, a most-favored-nation provision resets the yield of an existing loan to the rate of a new loan the issuer undertakes, so the existing loan remains “on market.” A sunset provision would allow the MFN protection to expire after a set period of time. (You can read more about MFNs here).

mfn sunsets on leveraged loans

The fact that more issuers are testing the waters is, in itself, a sign of the times. All the same, most of these more aggressive asks are likely to go unanswered. Indeed, in the year to date, among first-lien loans for which Covenant Review analyzed the final documents, 41% of covenant flexes favored investors on one of the following dimensions: MFN sunset, size of the free-and-clear-incremental tranche, and restricted payment basket flexibility.

Meanwhile, there were no issuer-friendly flexes for these terms. Of course, it’s tough to gain additional covenant concessions from investors even in the best of markets. Moreover, of the loans for which there was no change, only four leveraged loan issuers left a proposed MFN sunset intact.

LCD, an offering of S&P Global Market Intelligence, has flagged four surviving sunsets in 2016: Samsonite (12 months), McGraw-Hill Education (18 months), Leidos (12 months), and J.D. Power (18 months). Tellingly, all four transactions were sold in the second quarter, as market technical conditions turned in favor of issuers. All were heavily oversubscribed, and commanded issuer-friendly revisions, including tighter pricing.

Those deals notwithstanding, MFN sunset provisions remain the sacrificial lamb of documentation. They are routinely singled out in “subject to” commitments from investors, even as issuers push for ever-more-aggressive features. In recent days, for example, Leonard Green & Partners had to back away from a proposed six-month MFN sunset provision on its $770 million term loan backing the buyout of ExamWorks Group, according to LCD, which noted that the issuer nevertheless wrested lower pricing out of lenders while giving in on a series of investor-friendly document changes.

Looking at free-and-clear incremental tranches, all the flexes favored investors as well, Covenant Review found. Of the loans analyzed by Covenant Review, no fewer than 19% saw free-and-clear tranches trimmed during syndication (this number may increase as more deals move to final terms).

Even in a hot market, such changes can occur in the context of a successful deal like ExamWorks or SRS Distribution, which in June won tighter pricing on its dividend recap loan, but capitulated to investors on numerous documentation points, according to LCD News, which also reported that changes to SRS included a cap on cost-saving synergies adjustments, scaled back incremental facilities, and tighter restricted-payment and investment baskets.

Aggressive pushback against loosening terms reflects that—while yields rise and fall with market technicals—managers are loath to give on what amounts to the final line of defense, in the form of MFN, in today’s pervasive covenant-lite/covenant-loose environment. Further, given today’s lower clearing levels, players note that MFN is even more important to managers in shielding value from potential issuance if (1) market conditions erode; or (2) the financial performance of an issuer deteriorates. — Chris Donnelly/Steven Miller

Covenant Review recently introduced a monthly report that puts a lens on benchmark statistics for loan covenants, cutting the data by rating, sector, and sponsor where appropriate. Steven Miller can be reached at [email protected].

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Distressed Debt: Blackstone Acquires Minority Stake in Marathon Asset Management

Marathon Asset Management today announced that Blackstone Strategic Capital Holdings, a vehicle managed by Blackstone Alternative Asset Management (BAAM) acquired a passive, minority interest in the firm.

marathon logoMarathon will keep autonomy over its business management, operations, and investment processes, and will continue to be led by its existing management team, which includes Gabriel Spiegel, Andy Springer, Stuart Goldberg, and Jamie Raboy.

Marathon currently manages about $12.75 billion in assets in global corporate credit, distressed, special situations, structured credit, emerging markets, and leveraged loans.

Concurrent with the announcement, Andrew Rabinowitz will now be President and Chief Operating Officer after previously serving as a partner of the firm.

Vijay Srinivasan, senior managing director, will also run global credit research, taking over the role from Richard Ronzetti who announced his retirement. — Staff reports

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US Leveraged Loan Fund Assets Grow for Third Straight Month

US loan fund assets

Loan mutual funds’ assets under management grew for the third consecutive month in May, increasing by $1.27 billion, to $112.35 billion, after increasing by $1.44 billion in April, according to LCD.

While there were modest inflows to loan mutual funds last month, market-value gains also accounted for a portion of the increase. Secondary prices continued to grind higher in May, albeit at a much slower pace than in March and April, when market-value gains were the main driver behind the increase in AUM. – Kerry Kantin

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CLOs: DFG Investment Advisers raises $100M for New Strategic Fund

DFG Investment Advisers today announced that it has completed a $100 million first closing for a fund in anticipation of the risk-retention rules that go into effect at the end of this year for CLO managers.

DFG had over $2.5 billion in assets under management as of the end of May. Alberta Investment Management Corporation (AIMCo) announced a minority stake in the firm on behalf of its clients in January. DFG’s strategies range from corporate to structured credit assets through commingled funds, separate accounts, and CLOs.

The firm most recently closed a $406 million CLO, the Vibrant CLO IV via Goldman Sachs on June 10. — Andrew Park

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US Leveraged Loan, High Yield Bond Issuance Eases as Markets Eye Brexit, Fed

Leveraged finance issuance cooled considerably last week ahead of the Brexit vote in the U.K. and a Fed announcement in the U.S., and on the heels of a surge of activity in both the high yield bond and leveraged loan markets the previous week.

US leveraged loan high yield bond issuance

Issuance in the two segments totaled $15.1 billion last week, $9.9 billion in loans and $5.2 billion in bonds. That’s down significantly from the $30 billion the previous week ($17.9 billion/$12 billion), according to LCD, an offering of S&P Global Market Intelligence.

Year to date, U.S. leveraged loan issuance totals $203 billion, down from $218 billion at this point in 2015. There has been $117 billion in high yield issuance, down 34% from the $179 billion at this point last year.

Of note in the leveraged loan market, power concern Dynegy brought to market a $2 billion credit to refinance debt backing an ENGIE M&A deal, while business payment processing co. Wex approached the market for a $1.21 billion institutional loan backing the acquisition of Electronic Funds Source (there was a sizable revolving credit, too).

The highest-profile deal in the bond market last week: a $2.9 billion offering from Reynolds Group. That debt helps fund a cash tender offer. – Tim Cross

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2016 European Leveraged Loan Issuance, by Issuer Country

European leveraged loan issuance domicile 2

U.S. issuers have been unusually active in the European leveraged loan market.

Through June 15, companies based in the U.S., as well as French concerns, have provided 18% of the activity. The U.K. follows with 16%.

At this time last year, U.S. issuers had provided only 9% of the total volume in Europe, well behind the 27% from the U.K. The European market has had a firmer tone than the U.S. during much of the first half of this year, which partly explains the year-over-year difference. – Ruth McGavin

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Leveraged Loans: Amid Issuers’ Market, Dividend Deals Continue to Thrive

US dividend leveraged loan issuance 2

Lackluster M&A and LBO leveraged loan volume, along with the recent turnaround in market technicals, have helped propel a rebound in dividend/recapitalization loan activity in the second quarter of 2016.

With another two weeks to run until quarter-end, recap-related loan volume has climbed to its busiest level in a year, totaling $13.8 billion, according to LCD, a unit of S&P Global Market Intelligence.

The leveraged loan market hasn’t been this busy with recap deals since 2015’s second quarter, when $15.6 billion was spread across 35 transactions.

It’s no coincidence that the market for recaps is as strong as it was one year ago, as the technical backdrop is similar. This year, conditions started to improve for issuers in March and April, igniting a fresh wave of opportunistic activity in May. All told, demand outpaced supply in May by $12 billion, after a $3 billion surplus in April, marking the largest issuer-friendly imbalance since June 2015. – Chris Donnelly

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Bank of America Merrill Lynch Launches Electronic Loan Trading Platform

Bank of America Merrill Lynch yesterday launched its electronic loan trading platform, Instinct® Loans.

The platform, which was unveiled last week, is designed to trade on-the-run loans across all sectors. Loans that trade via the platform will trade on par documentation.

BAML today hosted two separate matching sessions that were said to have drawn significant client participation, and plans to do so daily going forward. During these sessions, which run 30 minutes, buyside accounts can bid or offer loans against mid-market prices provided by BAML’s traders. Matching bids and offers will trade immediately and electronically, with an eighth of a point fee commission paid to BAML split equally by both the buyer and seller.

Assignment fees will not be charged for loans that trade via Instinct® Loans; loans with an administrative agent that charges assignment fees cannot trade on the platform. Clients selling loans via the platform also have the option of T+3 settlement for an additional fee.

The platform is said to have received positive feedback from buyside accounts.

When it announced Instinct® Loans last week, BAML said the platform is part of its ongoing commitment to providing liquidity to clients.

Instinct® Loans is accessed through the bank’s Mercury® global markets portal, which has been in use since 2011. — Kerry Kantin

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