Leveraged loan market observations, California edition: Demand, bubbles, record CLOs

On my annual August West Coast swing I was privileged to have many informative discussions with our friends on the buy-side — including at Los Angeles’ Chavez Ravine, while watching Clayton Kershaw lead the Dodgers to a win over the Angles. What follows is a summary of the insights I was able to glean, which I pass along with as little editorializing as possible.

The buy-side is in the drivers seat
Clearly, managers have adjusted to today’s new normal, in which they are able to control pricing discussions. The reasons are well known. To summarize: Hot money is out of the asset class, for now. Retail flows are negative. High yield accounts are selling. And institutional investors have pulled in their horns for the same reason as have retail investors – a combination of bad press, duration fatigue and the overall risk-off posture of the market.

Bubble trouble?
There’s a broad consensus that terms and conditions are stretched, and debt multiples are pushing into an uncomfortable zone. Will there be another default spike in the years to come, as a result? Of course. Credit cycles have existed since the ancient Sumer civilization supposedly invented debt 3,500 years before Christ.

Given the solid economic outlook, however, an organic catalyst seems like a remote possibility in the near term. That does not dismiss an exogenous shock that sinks the global economy into recession (there are plenty of flash points around today to make such a risk more than idle). But even in that case most issuers can eat out of their own refrigerator, at least for a time, as a result of wide coverage ratios.

Underwriting calendar/CLO warehouses
One big way managers observe that the current period is far different than 2007 is a lack of overhang. Naturally, there is a wide array of CLO warehousing, but warehouse lines are far less vulnerable — from a bank’s perspective — because of large first-loss positions required of equity investors. As well, the underwriting calendar today of roughly $40 billion in M&A loans is a fraction of the roughly $350 billion that loomed over the market – and banks’ liquidity – when the fecal matter hit the rotor device in 2007.

A record year of $100 billion is in the book already, managers say, based on the year-to-Aug. 11  total of roughly $79 billion. The number could go a lot higher — perhaps upwards of $125 billion — given managers’ ability to source sub-par paper in the secondary, and the decent flow of new-issue on tap.

Retail flow
This will remain mostly negative until there’s some meaningful pick-up in rates. That said, 2015 could be a huge year for inflows if the Fed does, as expected, finally start raising rates.

Institutional mandates
Pension funds and other institutional investors have put the brakes on credit, and what mandates are in process are of the “go-anywhere” variety, that allows managers’ discretion to invest across products and regions.

To sum it up, I’d say for CLO managers these seem to be the best of times. They would not like to see further deterioration that would scare equity investors from the field. But the current state of play is highly conducive to ramping and printing deals (as the volume numbers attest). As for retail managers and those hunting for institutional mandates, it is not the worst of times, by a long shot. But it could be better.


Leveraged loan issuance sinks to $5B amid cash outflows

leveraged loan volumeU.S. leveraged loan issuance slid to $5.3 billion last week from more than $20 billion the week prior as institutional investors continued their retreat from all things leveraged finance, forcing a number of borrowers to rework deals or shelve them altogether.

With the week’s activity, year-to-date loan volume totals $392 billion, down from the $408 billion at this point in 2013 (there was a record $605 billion recorded during all of last year).

To be sure, the recent investor withdrawal from the leveraged finance segment – leveraged loans and, even more pronounced, high yield bonds – has thrown the market akilter, including high-profile credits that had been on the horizon.

“Let’s remember, big executions came to market on the idea that issuers could take advantage of hot market conditions, and a summer lull to print deals way in advance of closing,” wrote LCD’s Chris Donnelly late last week. “But it’s not working out like that.”

Indeed, in a high-profile example, Jupiter Resources shelved a $1.125 billion credit backing M&A. As well, SeaStar Solutions scrapped a credit planned to refinance some $208 million in debt while HCP HCP +1.59% Global shelved a $380 million loan backing a dividend to shareholders. Also notable was Charter Communications, which revised a loan backing the company’s acquisition of Comcast assets. – Tim Cross


Revel to cease operations by Sept. 10, company continues to ‘hope for sale’

revel logo

Revel AC said that it would cease operations by Sept. 10, subject to regulatory approvals.

According to a statement issued this morning by the company, “challenges have arisen in our attempts to sell Revel as a going concern.”

The company added, “[w]hile we continue to hope for a sale of Revel, in some form, through the pending bankruptcy process, Revel cannot avoid an orderly wind down of the business at this time.”

As reported, an auction for the company’s assets had been scheduled for Aug. 7, but was postponed one week, to Aug. 14, with the company saying it needed “additional time to fully analyze and evaluate the bids received.” – Alan Zimmerman




LightSquared aims for Oct. 20 confirmation hearing amid deep divides

lightsquared logo

The bankruptcy court overseeing the Chapter 11 proceedings of LightSquared has set a confirmation hearing for Oct. 20 on the various reorganization plans that have now been proposed in the case.

That schedule is designed to see a reorganization plan confirmed by Oct. 31.

But given the events in the case over the past week, arriving at that date was no simple matter, even as Bankruptcy Court Judge Shelly Chapman stressed the need for a “definitive schedule” to bring the case to a conclusion. Indeed, based on the deep disagreements expressed by the various warring parties in the case late yesterday afternoon at a hearing in Manhattan, and the myriad issues related to conducting a confirmation hearing for three reorganization plans in a case that is, to put it mildly, extremely contentious, it is unclear whether that schedule will be met.

Consider, yesterday’s status conference, the purpose of which was simply to set a confirmation hearing schedule, took nearly two hours.

Still, if Chapman and the many attorneys appearing at the hearing, which stretched into the early evening, were able to agree on anything it was that the case had now reached an inflection point at which a resolution – one reached sooner rather than later – was in the interests of all of the parties, even if they disagreed on what that resolution would look like.

“We have a schedule. We’re sticking to the schedule,” Chapman said.

Thomas Lauria, the attorney for the ad hoc panel of secured lenders in the case that jointly filed a proposed reorganization plan last week with the company, discussed the economic pressure driving the case at this point. According to Lauria, when LightSquared went into Chapter 11 in 2012 it owed creditors $2 billion, but that the amount had now grown to $3 billion. That tab would increase by another $300 million by the time the company emerges from Chapter 11 in the first quarter of 2015, Lauria said, even if all goes according to the current schedule, and could climb as high as an additional $400 to $500 million if the confirmation process is delayed beyond October and emergence leaks into the second quarter of 2015.

The logistical problem facing the parties now is that in the wake of the breakdown of the global consensus coming out of mediation, there are three potential reorganization plans at play in the case.

One plan is the proposed plan filed last week by the company and the ad hoc LP lender panel that would reorganize the company – which has its secured debt split between its parent company (LightSquared Inc., with roughly $322 million of secured pre-petition debt outstanding) and a limited partnership unit that is the issuer of the company’s larger pre-petition secured facility (LightSquared LP, with about $2 billion outstanding) – on a consolidated basis (see “LightSquared files revised reorganization plan,” LCD, Aug. 7, 2014). Among other things, the consolidated structure addresses various intracompany issues, most significantly LightSquared Inc.’s guarantee of LightSquared LP’s secured debt.

But the sole holder of the LightSquared Inc. secured debt, MAST Capital Management, has said it intends to reject the plan, because it does not want the recovery offered to it in the consolidated plan, one comprised of new debt and equity in the reorganized company. Under the consolidated plan, MAST’s rejection would result in LightSquared LP reorganizing on a standalone basis, leaving LightSquared to reorganize on its own as well, with the intracompany issues to be resolved by post-confirmation litigation.

As for LightSquared Inc. reorganizing as a standalone company, there are currently two potential reorganization plans for the parent company on the table.

MAST is seeking to reprise a plan it filed earlier in the case that calls for LightSquared Inc. unit One Dot Six, a Reston, Va.-based communications company, to be auctioned off, with MAST acting as the stalking-horse bidder with a credit bid of its DIP claims in the case.

Meanwhile, Harbinger Capital filed a new proposed plan yesterday for LightSquared Inc. that would pay MAST’s claim in full. That plan would be financed with a new $460 million DIP facility that would convert into a new $360 million first-lien term exit facility and a $100 million first-lien exit revolver, along with junior investment in the form of $100 million of new equity financing from Harbinger, $160 million of new equity financing from an affiliate of JP Morgan Chase, and $40 million of new subordinated debt from JP Morgan Chase.

An attorney for MAST said today that MAST would vote in favor of the Harbinger plan, though several parties at today’s hearing questioned whether financing to back to plan would materialize. An attorney for JP Morgan Chase, however, expressed confidence that the plan could attract the needed funding.

Beyond that consideration, each of the proposed plans, to one degree or another, carry various uncertainties and contingencies that could have ripple effects with respect to the other plans, and would therefore affect the issues that need to be addressed at confirmation.

For example, if the parties are able to agree on a consolidated plan, it would simplify matters considerably. But if there are separate reorganization plans for LightSquared Inc. and LightSquared LP, it would give rise to a contested valuation hearing in order to determine the value of the recovery for LightSquared LP’s secured lenders, a determination that would need to be made to determine the extent to which, if any, LightSquared Inc. would remain on the hook as a guarantor of the LP debt. That could be time consuming, both at a potential hearing and in the discovery disputes that would be sure to occur leading up to contested valuation fight.

And that’s not even to mention the poisoned atmosphere in which the parties are operating. There is a split between the Charles Ergen controlled vehicle SPSO, which holds LP secured debt potentially subject to equitable subordination, and other holders of the LP debt. Referring to Ergen’s interests in LightSquared competitor DISH, Lauria noted that while Ergen could benefit from LightSquared’s collapse, other holders of the debt are simply seeking the maximum recovery possible on their investment.

Rachel Strickland, an attorney for Charles Ergen-controlled vehicle SPSO, both a key player and key source of controversy in the case, described the atmosphere in the case as one of “mistrust and paranoia on all sides.” – Alan Zimmerman