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Loan bids post fourth consecutive drop amid outflows, slowing CLO issuance

The average bid of LCD’s flow-name composite fell 11 bps in today’s reading to 98.78% of par, from 98.89 on Tuesday, Aug. 11.

Among the 15 names in the sample, eight declined, three advanced, and four were unchanged from the prior reading. Avaya’s B-7 term loan due 2020 (L+525, 1% floor) was once again the biggest mover in either direction, falling another point in today’s reading to an 88.5 bid, extending losses on its 3Q results released last week amid the volatile market conditions.

After losses deepened Wednesday morning, loans began clawing back losses yesterday afternoon, with the recovery continuing today, as some buyers stepped in to capitalize on the recent weakness.

Overall, the market has had a slightly negative bias in recent sessions with loan mutual funds recording outflows and CLO issuance slowing, while traders also say that some high-yield and crossover accounts have been selling loans amid the recent downdraft in high-yield. Lipper last week reported an outflow of $594 million, the largest in 26 weeks, and the market appears poised for an even more considerable outflow this week. LCD data project an outflow, per the Lipper sample of weekly reporters, of $775 million for the five days ended Aug. 12.

With prices well off recent highs – the percentage of performing Index loans bid at par or higher fell to 23.1% as of yesterday’s close, from 40.6% a week earlier and 54% three weeks ago – some accounts are viewing the recent weakness as a buying opportunity, and there’s speculation that today’s relative bargains could revive the lackluster CLO issuance as of late. Regardless, buyers began coming out of the woodwork.

Nevertheless, this recent secondary weakness has bled into the primary market. While there’s ample demand to get deals done, issuers and arrangers can’t be as aggressive as they might have been a week ago, especially with a few recently issued deals that cleared tight relative to their ratings profiles bid below their issue prices, such as Pharmaceutical Product Development and HD Supply.

With the average loan bid tumbling 11 bps, the average spread to maturity gained two basis points, to L+415.

By ratings, here’s how bids and the discounted spreads stand:

  • 99.63/L+367 to a four-year call for the nine flow names rated B+ or higher by S&P or Moody’s; STM in this category is L+365.
  • 97.52/L+499 for the six loans rated B or lower by one of the agencies; STM in this category is L+474.

Loans vs. bonds
The average bid of LCD’s flow-name high-yield bonds dropped 40 bps, to 97.47% of par, yielding 7.48%, from 97.87 on Aug 11. The gap between the bond yield and discounted loan yield to maturity stands at 327 bps. – Staff reports

To-date numbers

  • August: The average flow-name loan fell 87 bps from the final July reading of 99.65.
  • Year to date: The average flow-name loan rose 186 bps from the final 2014 reading of 96.92.

Loan data

  • Bids decrease: The average bid of the 15 flow names slipped 11 bps, to 98.78% of par.
  • Bid/ask spread expand: The average bid/ask spread grew, to 38 bps.
  • Spreads higher: The average spread to maturity – based on axe levels and stated amortization schedules – inched up two basis points, to L+415.
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Leveraged loans: Stricter guidelines send middle market debt multiples south

Debt multiples at middle market companies have retreated to a 2.5-year low following last year’s comb-through by regulators for compliance with stricter lending guidelines.

For the first half of 2015, total leverage averaged 4.6x among companies generating $50 million or less of annual EBITDA, down from a record 5x for 2014, according to LCD. Senior multiples have fallen more significantly, to 4.3x, from 4.9x last year.

middle market table

Along with the tighter leverage, fixed-charge ratios are better cushioned, increasing for the first time in four years. For the first half, the average fixed-charge ratio was 3.2x. The ratio was even better in the second quarter, at 3.8x, according to LCD.

While banks have reined in their underwriting overall, they haven’t thrown in the towel completely. Several aggressive transactions in 2015 have been led by banks that deem the relationship worthy.

In recent weeks, Barclays, Angel Island Capital, and Jefferies launched a debt-heavy transaction for Riddlesburg, Pa.-based PetroChoice, a distributor of vehicle lubricants. Barclays is subject to the lending guidelines, but it has teamed up with Angel Island Capital and Jefferies, which are not constricted by the same set of rules.

middle market chart

The financing is covenant-lite and includes a $235 million, seven-year first-lien term loan that’s talked at L+375-400, with a 1% LIBOR floor, offered at 99, with six months of 101 soft call protection. The first-lien loan adjoins a $90 million, eight-year second-lien term loan talked at L+775-800, with a 1% floor, offered at 98.5, with hard calls of 102 and 101 in years one and two, respectively. Proceeds back the buyout of the company by Golden Gate Capital. Leverage multiples are 4.5x through the first-lien and 6.2x total. Commitments are due Thursday, Aug. 13. Agencies assigned B/B2 issuer ratings.

At roughly $52 million in annual EBITDA, PetroChoice sits at the larger end of the middle market spectrum and would slip just outside LCD’s traditional $50 million-and-under cutoff. Through June 30, 36 companies were boxed in that traditional category and generated average EBITDA of $34.4 million, down from $39.2 million in the first half of last year. LCD’s pool tends to skew toward the larger end of the market where banks still play a significant role in syndicated transactions.

In June, SunTrust extended 4.5x senior and 6.6x total multiples to GI Partners to back the buyout of MRI Software, a known name in the market that operates in a favorite sector with long-term contracts and strong renewal rates. It also helped that GI wrote a $216 million equity check, for about half of the pro forma capital structure. The deal’s $155 million, six-year term loan closed at original talk of L+425, but the issue price was tightened to 99.5, from 99 (with a 1% floor). The company drew a B issuer rating from Standard & Poor’s. Vista Equity is the seller. A $70 million, seven-year second-lien tranche cleared at original talk of L+800 at 98.5, also with a 1% floor.

In the shadow banking community, finance companies say that leverage has not shown any signs of deflating. In fact, pitches are aggressive as ever, with sponsors pushing hard for multiples in the 6x area on unitranche loans, or 4.5x by 6.5x on first-/second-lien structures that a year ago would have been in the 5x range, managers say. Even 7x multiples have popped up on a few outer-limit pitches recently. Fincos don’t cave on every deal, but the pressure is intense to win mandates on generous amounts of debt, these lenders say.

Ares Capital Corp. (Nasdaq: ARCC), the largest business development corporation by several measures, including assets under management with a portfolio of roughly $8.6 billion at fair value, has boosted portfolio leverage over the last year. Average net leverage through the second quarter was 5.1x, up from 4.6x in the same period last year, the company reported this week. Moreover, the average interest coverage ratio dropped to 2.8x, from 3x. Average EBITDA for the portfolio is $59.6 million, up from $54 million in the second quarter of last year.

Average net leverage within ARCC’s separate unitranche portfolio, which totals $10 billion in principal amount, ticked up to 4.9x after holding steady at 4.8x throughout 2014. Interest coverage on these investments maintained a 3.6x ratio from the two previous quarters and improved from 3.4x in the year-ago period. Average EBITDA among unitranche issuers is $53.7 million.

Meanwhile, average leverage for Franklin Square Investment Corp.’s (NYSE: FSIC) $436 million portfolio ticked up to 4.8x from 4.6x during the six-month period from October 2014 to March 31, 2015. Average EBITDA was $50.7 million at the end of March. FSIC’s second-quarter results are due out Aug. 11.

As summer turns to fall, the market expects little to change. Banks will try to compete on pricing, while fincos will use debt to their advantage. In either case, limited supply will continue to leave both groups chasing too few mandates. – Kelly Thompson

Follow Kelly on Twitter @MMktDoyenne for Middle market financing news

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Mid-market corporate auctions in Europe to watch

Inflexion Private Equity has emerged as the frontrunner to acquire Quilvest-owned sushi chain Yo! Sushi, according to reports. Quilvest mandated Canaccord Genuity to run the process, which attracted several financial sponsors understood to include 3i Group and Morgan Stanley Private Equity, as well as Inflexion. Inflexion has subsequently won exclusivity after the final round of bidding, and is expected to acquire the company for roughly £100 million.

The auction of Dutch lingerie retailer Hunkemöller has taken an interesting twist, with U.S.-based private equity group Sycamore Partners reportedly submitting a last-minute bid that could trump offers from rival buyout groups CVC Capital Partners, Apax Partners, and The Carlyle Group, according to reports. The company, which is owned by PAI Partners, is valued at roughly €440 million.

Corsair Capital is understood to be close to launching a formal sale process for ATM company NoteMachine, according to market sources, who suggest Jefferies is likely to run the auction, which could begin in September or early October.

NoteMachine – which Corsair acquired in 2012 from buyout peer Rutland Partners – could fetch roughly £320 million. The business is backed by a £120 million unitranche loan provided by GE Capital and Ares Capital Europe joint venture the ESSLP, upsized last June from an existing £76.5 million facility.

Health and safety consultancy Santia is also set for the auction block, with turnaround investor and current owner Better Capital mandating PwC in recent weeks to advise on strategic options for the business. In Better Capital’s most recent financial statements, Santia carried a NAV of £40 million as of March 31, 2015 – up from £36.2 million a year earlier.

After a flurry of deals already in the sector this year, two more travel agents are soon to carry ‘for sale’ signs. Equistone Partners Europe is eyeing an exit for Audley Travel, according to reports, and has mandated Rothschild to run the auction. The business could be valued at more than £200 million.

Inflexion is also understood to be eyeing a realisation of its investment in On the Beach, which carries a £250 million valuation. The firm is reportedly exploring an IPO of the business, but could yet run an auction process.

Polish national airline LOT has attracted the interest of private equity group Indigo Partners, according to reports. Indigo, an experienced airline investor, is reportedly looking to buy a stake in the carrier and invest several hundred million zloty to help Warsaw, the airline’s home city, become a hub for the Central and Eastern Europe region.

In Ireland meanwhile, private equity group CapVest is lining up financing to support a bid for plastics and environmental services company One51. CapVest made a preliminary approach to the firm’s board regarding a €288 million (or €1.80 per share) offer for the Irish company. The firm generated EBITDA of €21.9 million last year, on revenue of €276.5 million. – Oliver Smiddy

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CLO roundup: US prints two deals, Europe closes on first refinancing

global CLO issuance

Just two new-issue transactions priced globally last week amid the August slowdown, with chatter in Europe saying two managers have already opted to delay pricing transactions until September, when the market is fully staffed again. Global issuance edged up to $77.86 billion, according to LCD. – Sarah Husband

Year-to-date statistics through July 31 are as follows:

  • Global issuance is $77.86 billion.
  • U.S. issuance is $67.21 billion from 126 deals, versus $79.54 billion from 146 deals during the same period last year.
  • European issuance is €9.58 billion from 24 deals, versus €7.7 billion from 18 deals during the same period last year.

twitter icon Follow Sarah on Twitter for news and analysis on the global CLO markets.

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Main Street Capital books $4.7M loss in 2Q for Family Christian loan

Main Street Capital booked a $4.7 million loss for an investment in retailer Family Christian in the recent quarter, resulting in a decline in the share of its portfolio companies on non-accrual status.

Main Street Capital realized the loss for the investment in the quarter ended June 30, a 10-Q released today showed. Specialty Christian retailer Family Christian, based in Grand Rapids, Mich., filed for bankruptcy in February.

Main Street Capital’s investment in FC Operating as of March 31 comprised $5.4 million of secured debt due November 2017 (L+1,075, 1.25% LIBOR floor) and was listed as non-accrual at that time.

Due to the exit of the private loan investment in Family Christian, Main Street Capital has only four investments on non-accrual status. These investments comprised 0.3% of the fair value of Main Street’s investment portfolio, and 3.1% on a cost basis. This compares to 1.2% of the investment portfolio’s fair value on March 31, and 3.9% on a cost basis.

The four investments currently on non-accrual status are the same as in the previous quarter: Quality Lease and Rental HoldingsCalloway LaboratoriesModern VideoFilm, and Clarius BIGS.

Quality Lease and Rental Holdings, based in El Campo, Texas, provides oilfield rental equipment, products, and services. The company operates as a subsidiary of oilfield housing company Rocaceia, which filed for Chapter 11 in October with debt of $10-50 million.

Main Street Capital’s investment in Quality Lease and Rental Holdings included $30.8 million of 12% secured debt whose fair value was booked at under $1 million as of June 30.

Main Street Capital’s investment in Calloway Laboratories includes a $7.3 million 12% PIK first-lien term loan due 2015, marked at $2.8 million at fair value as of June 30. Calloway Laboratories, based in Woburn, Mass., provides clinical toxicology laboratory services, specializing in proprietary drug testing protocols.

The investment in Modern VideoFilm included a $6.3 million first-lien term loan due 2017 (L+500, with a 1.5% floor, 8.5% PIK), was marked below $1 million as of June 30. The Burbank, Calif.-based company provides post-production services to the film and television industry.

A loan for Clarius BIGS was also on non-accrual, comprised of $4.4 million of 12% secured debt, marked at $1.7 million as of June 30. The company provides prints and advertising film financing. It is a sister company of Clarius Entertainment, which is a Los Angeles-based feature film acquisition, marketing, and distribution company.

Houston-based Main Street provides long-term debt and equity capital to lower middle market companies and debt capital to middle market companies. The business-development company trades on the NYSE under the ticker MAIN. – Abby Latour

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

 

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Amid cash outflows, US leveraged loan volume drops from recent weeks

US leveraged loan volume

Leveraged loan issuance in the U.S. this week sank to $7.7 billion, from roughly $21 billion in each of the previous two weeks, according to S&P Capital IQ LCD. With the recent activity, loan volume so far in 2015 stands at $304 billion, down from $393 billion at this point in 2014.

It was a busy week in market movement – the drop in volume notwithstanding – with numerous deals flexed upward and downward during the syndications process.

The drop in volume proper coincides with a relatively large retreat from market by investors, which this week withdrew nearly $600 million from U.S. loan funds, the largest net outflow in six months, according to Lipper.

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Leveraged loan funds see largest outflow in 26 weeks ($594M)

leveraged loan fund flows

Leveraged loan funds reported the largest one-week net outflow in 26 weeks, at $594 million, for the week ended Aug. 5, according to Lipper. The outflow builds heavily on last week’s $13 million withdrawal, although that was notable as the first net outflow in four weeks.

This week’s result reflects a larger, $598 million withdrawal from mutual funds, filled back in with a $4 million flow to the ETF segment, or a negative 1% correlation. In contrast, last week’s small outflow was 2% ETF-related.

With today’s net outflow, the trailing four-week average falls back into the red, at negative $91 million per week, from positive $62 million last week and from negative $26 million two weeks ago. The deepest reading in this measure recently was negative $268 million five weeks ago.

The year-to-date outflow deepens to $4.5 billion, with 1% tied to ETFs, versus an outflow of $1.6 billion at this point last year that reflected outflows of $2.1 billion from mutual funds countered by $550 million of inflows to ETFs.

In today’s report, the change due to market conditions was positive $155 million, which is barely 0.2% against total assets, which were $92.6 billion at the end of the observation period. The ETF segment comprises $6.8 billion of the total, or approximately 7% of the sum. – Staff reports

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Leveraged loan prices see steepest secondary market slide since December (thanks to Avaya)

The average bid of LCD’s flow-name composite fell 40 bps in today’s reading, to 99.08% of par, from 99.48% of par on Aug. 15.

Though the composite was biased towards the downside – nine loans declined, one advanced, and five were unchanged from the previous reading – the magnitude of the loss was exacerbated by a 4.25-point drop in the average bid price of Avaya’s B-7 term loan due 2020 (L+525, 1% floor), which slid on its third-quarter results ($).

The sole advancer was the Neiman Marcus term loan due 2020 (L+325, 1% floor), which inched up an eighth of a point, to a 99.375 bid, following news the company filed for an IPO.

Excluding Avaya, the average bid of the other 14 names declined a more measured 12 bps, which is reflective of the slightly negative bias in the secondary in recent days. Sources in part chalk up the weaker tone to the time of year, as CLO issuance has slowed of late. Also, mutual funds have seen modest outflows in recent days; LCD data project a $334 million outflow (per the Lipper sample of weekly reporters) for the five business days ended Aug. 5.

At the same time, however, the loan market has seen a flurry of allocations over the past couple of weeks and there are many more coming down the pike, as arrangers continue to roll out new deals even though the calendar has already turned to August.

Technically, the average bid stands at its lowest level since March 17, but note that there have been some changes to the sample since then, including the removal of Fortescue Metals Group.

Another notable stat: Today’s 40 bps drop is the largest since December 2014, when the market was roiled in the wake of a plunge in oil prices. Today’s drop, however, pales in comparison to the 1.56-point drop posted in the Dec. 16 reading, when the average bid fell to 95.28. – Staff reports

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CLO Round-up: With SEC clarity re risk-retention (finally), an active week

global CLO volume

After a sluggish start to the month, it was an active week in the U.S., both in terms of new issues and on the regulatory front. Four U.S. new-issue transactions priced, while in Europe, AXA Investment Managers priced the third deal of the month, a €362.3 million transaction, via J.P. Morgan. Through Friday, July 24, global issuance rises to $73.67 billion.

The SEC provided much-awaited guidance that CLOs issued prior to Dec. 24, 2014 – the date the final risk-retention rule was published – will be able to refinance debt tranches under certain conditions after the rule takes effect in December 2016 without being subject to risk retention. The SEC’s position is reflected in a July 17 no-action letter in response to a request from Crescent Capital Group. It provides the market with clarity around the refinancing issue, which has been a topic of discussion since the final risk-retention rule was first published in October 2014. – Kerry Kantin/Isabell Witt

Year-to-date statistics, through July 24, are as follows:

  • Global issuance totals $73.67 billion
  • U.S. issuance totals $63.94 billion from 120 deals, versus $71.11 billion from 133 deals during the same period last year
  • European issuance totals €8.75 billion from 22 deals, versus €6.92 billion from 16 deals during the same period last year

 

This analysis is taken from a longer LCD News story, available to subscribers here, that also details

  • Recently priced CLOs
  • CLO pipeline
  • US CLO volume/outstandings
  • European CLO volume/outstandings
  • European priced CLOs

 

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Leveraged loan funds report third consecutive week of inflows

Leveraged loan funds reported inflows of $208 million for the week ended July 22, following inflows of $34 million and $19 million in the previous two weeks, which reversed a five-week outflow streak worth a combined $1.2 billion, according to Lipper.

This week’s result was attributed to a $168 million inflow to mutual funds, along with a $40 million inflow to the ETF segment. In contrast, last week’s $34 million inflow came from a $37 million inflow to ETFs offset by a $3 million outflow from mutual funds.

With today’s net inflow, the trailing four-week average improves to negative $26 million, from negative $122 million last week and negative $208 million two weeks ago.

The year-to-date outflow is now $3.9 billion, with 2% tied to ETFs, versus an inflow of $352 million at this point last year that was roughly 216% tied to ETFs.

In today’s report, the change due to market conditions was negative $98.5 million, which is essentially nil against total assets, which were $93.3 billion at the end of the observation period. The ETF segment comprises $6.8 billion of the total, or approximately 7% of the sum. – Joy Ferguson