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Market Reset: Is this the new normal for leveraged loans?

Amid softening technical conditions and the risk-off theme that has dominated capital markets lately, loan yields have climbed 50-75 bps over the past month, with prices on loans falling markedly, as evidenced by the secondary bid distribution chart.

loan bids by range

Does the softer market represent a new normal for leveraged loans?

The outlook, as always, is in the eye of the beholder. In recent days, stability in the equity markets has allowed loan prices to find a bottom. That said, participants suggest the bias for the time being may be negative. Here’s why:

  • Loan fund flows: managers expect outflows to persist, what with rates falling in recent weeks. That will put more supply in the system as managers sell loans to meet redemptions.
  • Relative-value players: HY funds also remain net sellers of loans, participants say, further pressuring prices.
  • CLOs: The pace of prints remained robust in early October with managers inking $6.5 billion through the 16th, pushing year-to-date issuance to a record $99.9 billion. Still, players expect the number of new deals to fall significantly until conditions improve. That may drain liquidity from the system in the months ahead.
  • Supply: while off the post-credit-crunch highs of August, there remains $33.7 billion on the M&A forward calendar, much of which will hit the market over the final months of 2014. Given today’s flagging loan demand, placing this paper may be challenging.

 

This analysis is part of a more detailed LCD News story, available to subscribers here. – Steve Miller

Follow Steve on Twitter for an early look at LCD analysis, plus market commentary.

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Leveraged loan fund outflows reach nearly $1B, led by mutual funds, 14th straight week of outflows

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Cash outflows from bank loan funds increased to $946 million during the week ended Oct. 15, according to Lipper. The reading reflects mutual fund outflows of $869 million plus a $76 million outflow from the exchange-traded fund segment.

The latest reading is an uptick from an outflow of $825 million last week and it represents the 25th outflow in the past 27 weeks, for a net redemption of $15 billion over that span.

The trailing four-week average deepens to negative $897 million per week, from negative $807 million last week and negative $686 million two weeks ago. This is the largest average since a negative $944 million reading for the four weeks ended Aug. 24, 2011.

The year-to-date fund-flow reading pushes deeper into negative territory, at roughly $8 billion, based on a net withdrawal of $8.2 billion from mutual funds against a net inflow of $131 million to ETFs. In the comparable year-ago period, inflows totaled $45.9 billion, with 11% tied to ETFs.

The change due to market conditions was negative $829 million, versus total assets of $98.3 billion at the end of the observation period. The ETF segment comprises $7.4 billion of the total, or approximately 8%. – Joy Ferguson

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Leveraged loan fund outflows stay heavy in 13th consecutive week

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Cash outflows from bank loan funds moderated, but remain deep in the red, at $825 million during the week ended Oct. 8, according to Lipper. The reading is based on deeper mutual fund outflows, at $899 million, dented by an inflow of $74 million to the exchange-traded fund segment.

While less than last week’s $1.4 billion outflow, the latest withdrawal is the 24th outflow of the past 26 weeks, for a net redemption of $14 billion over the span.

With this week’s outflow, the trailing four-week average deepens to negative $807 million per week, from negative $686 million last week and just negative $435 million the week prior. A recent peak was negative $858 million from the week ended June 11.

The year-to-date fund-flow reading pushes deeper into negative territory, at $7.1 billion, based on a net withdrawal of $7.3 billion from mutual funds against a net inflow of $207 million to ETFs. In the comparable year-ago period, inflows totaled $45.4 billion, with 11% tied to ETFs.

The change due to market conditions was positive $81 million, which is almost nil versus total assets of $100.1 billion at the end of the observation period. The ETF segment comprises $7.6 billion of the total, or approximately 8%. – Matt Fuller

Follow Matthew on Twitter @mfuller2009 for leveraged debt deal-flow, fund-flow, trading news, and more.

 

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Leveraged loan fund outflows grow to $1.44B, 4x increase, led by mutual funds

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Cash outflows from bank loan funds increased nearly fourfold, to $1.44 billion during the week ended Oct. 1, versus $382 million last week, according to Lipper. The recording is the largest outflow since the week ended Aug. 6, when $1.5 billion left loan funds.

The influence of bank-loan ETFs on this week’s number was 18%, or $262 million, versus an outflow of $48 million from ETFs last week.

There now have been 23 weeks of outflows over the past 25 weeks, for a total outflow of $13.3 billion over that span, which follows a record-shattering 95-week inflow streak that totaled $66.7 billion.

With this week’s large outflow, the trailing four-week average gaps out to a negative $686 million per week, from negative $435 million last week. This measure remains below the recent peak of negative $858 million from the week ended June 11.

The year-to-date fund-flow reading pushes deeper into negative territory, at $6.3 billion, based on a net withdrawal of $6.4 billion from mutual funds against a net inflow of $133 million to ETFs. In the comparable year-ago period, inflows totaled $45 billion, with 11% tied to ETFs.

The change due to market conditions was negative $126 million, versus total assets of $100.8 billion at the end of the observation period. The ETF segment comprises $7.5 billion of the total, or approximately 7%. – Joy Ferguson

 

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The 3rd Quarter Leveraged Loan Market, in 6 Charts

The U.S. leveraged loan market downshifted in 2014′s third quarter, prompting yields to rise. Things looks pretty much like this:

Despite strong CLO issuance,

chart1

… a combination of record retail outflows …

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… and a spike in M&A volume …

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… pushes clearing yields higher again.

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Opportunistic activity falls as a result …

 chart5

… putting a damper on volume.

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These charts are from a quarterly wrap, courtesy S&P Capital IQ/LCD’s Steve Miller.

For lots more charts, news and stats on the leveraged loan market check out LeveragedLoan.com, a free site powered by LCD to promote the asset class.

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Leveraged loans out-perform – sort of – high yield bonds, other fixed-income in grim September

returns by asset class

After gaining 0.15% in August, the S&P/LSTA Leveraged Loan Index fell 0.60% in September, its worst monthly performance since June 2013. September’s setback dropped the year-to-date return for the S&P/LSTA Index to 2.11%, from 2.73% at the end of August.

Loans were hardly the only asset class to feel the pain in September. Risk assets broadly were dented by geopolitical concerns. As well, expectations for rising rates pushed the 10-year Treasury yield up 17 bps, to 2.52% on Sept. 30, from 2.35% at the end of August, according to the Department of the Treasury. As a result, loans outperformed equities as well as the three fixed-income categories we track here monthly.

This analysis is taken from S&P Capital IQ/LCD’s 3rd-quarter data wrap-up, available to LCD News subscribers here. Also detailed in that story:

  • Monthly loan returns, per the S&P/LSTA Index
  • Annual returns, per the Index
  • Loan returns by rating
  • Loan outstandings
  • CLO issuance
  • Leveraged loan trading prices
  • Loan M&A forward calendar
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CLO roundup: Europe supply passes FY forecast, US pipeline builds

Europe saw the bulk of the action this week, pricing three new CLO transactions, against two for the U.S. market. The ABS East conference, taking place at the start of the week, dampened new-issue activity stateside, leaving the European CLO market to step into the spotlight on two counts: supply and spreads.

LCD subscribers can click here for full story, analysis, and the following charts:

  • Deal pipeline
  • US arbitrage CLO issuance and institutional loan volume
  • Global CLO volume

. - Sarah Husband

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Leveraged Loans: CLOs drive investor mart as retail remains in red

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In the third quarter, the investor base for new-issue leveraged loans grew even more dependent on CLO funding amid (1) retail outflows from loan funds and (2) ongoing reticence by banks and securities firms to play in loans in which they don’t have an arranger role.

Banks, in fact, were again bit players during the first three quarters of 2014, taking a record-low 9.9% of non-arranger allocations to leveraged loans, according to LCD’s analysis, down from 14.1% in 2013. Banks’ share in the third quarter was in line, at 9.8%.

LCD subscribers, please click here for full story, analysis, and the following charts:

  • Share of institutional volume rate four-B or higher
  • Number of loan investor groups
  • Visible inflows to the loan asset class
  • Primary market for institutional loans
  • Average AAA CLO spread
  • Share of S&P/LSTA Index bid below par and single-B YTM
  • Repricing volume
  • Primary market for institutional loans
  • Relative-value players’ share of allocations and high-octane volume
  • Primary allocations of 2014 institutional loans by investor type
  • Number of managers that issued a 2.0 CLO
  • Average CLO size
  • CLO and Index outstandings
  • CLO outstandings as a share of S&P/LSTA Index
  • CLO outstandings
  • Assets under management 2Q 2014


– Steve Miller

Follow Steve on Twitter for an early look at LCD analysis, plus market commentary.

 

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Leveraged loan funds – outflow streak continues into 11th consecutive week

Cash outflows from bank loan funds totaled $382 million during the week ended Sept. 24, narrower than $583 million in outflows last week, but a slight uptick from the $341 million outflow recorded two weeks ago, according to Lipper.

The influence of bank-loan ETFs on this week’s number was 12%, or $48 million. This compares to an outflow of $16 million from ETFs last week.

There now have been 22 weeks of outflows over the past 24 weeks, for a total outflow of $11.9 billion over that span, which follows a record-shattering 95-week inflow streak that totaled $66.7 billion.

The trailing four-week average gaps out slightly to a negative $435 million per week, from negative $414 million last week. This measure remains below the recent peak of negative $858 million from the week ended June 11.

The year-to-date fund-flow reading pushes deeper into negative territory, at $4.8 billion, based on a net withdrawal of $5.2 billion from mutual funds against a net inflow of $395 million to ETFs. In the comparable year-ago period, inflows totaled $44 billion, with 11% tied to ETFs.

The change due to market conditions was negative $217 million, versus total assets of $102.4 billion at the end of the observation period. The ETF segment comprises $8 billion of the total, or approximately 8%. – Joy Ferguson

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Leveraged loan prices slip to lowest level since July 2013

With a negative bias creeping back into the market, the average bid of LCD’s flow-name composite slid 16 bps in yesterday’s reading, to 98.36% of par, from 98.52 on Sept. 18.

Among the 15 names in the sample, eight declined, one advanced, and six were unchanged from the previous reading. Fortescue andIntelsat were the largest decliners, with each falling half a point, to be bid at 98.5 and 98.75, respectively, in today’s reading.

With the allocation of the $6.75 billion TLB for Burger King expected within the coming days, not to mention another $760 million of BWIC supply hitting the market today, the secondary loan market has cooled. With today’s drop, the average bid is at its lowest level since July 2, 2013.

Accounts remain focused on the new-issue market, and Burger King’s deal in particular, as the fast-food chain’s deal would be the largest loan to allocate since Hilton Worldwide’s $7.6 billion term loan in September 2013.

With the average bid dropping 16 bps, the average spread to maturity rose three basis points, to L+437.

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

  • 98.89/L+397 to a four-year call for the 10 flow names rated B+ or higher by S&P or Moody’s; STM in this category is L+388.
  • 97.3/L+554 for the five loans rated B or lower by one of the agencies; STM in this category is L+536.

Loans vs. bonds
The average bid of LCD’s flow-name high-yield bonds fell 46 bps, to 103.02% of par, yielding 6.18%, from 103.48 on Thursday. The gap between the bond yield and discounted loan yield to maturity stands at 185 bps. – Staff reports

To-date numbers

  • September: The average flow-name loan is down 73 bps from the final August reading of 99.09.
  • Year to date: The average flow-name loan is down 157 bps from the final 2013 reading of 99.93.

Loan data

  • Bids fall: The average bid of the 15 flow names slipped 16 bps, to 98.36% of par.
  • Bid/ask spread widens: The average bid/ask spread rose five basis points, to 39 bps.
  • Spreads rise: The average spread to maturity – based on axe levels and stated amortization schedules – rose three basis points, to L+437.