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Market Survey (Pre-Brexit Vote): US Leveraged Loan Default Rate to Hit 2.70% in June 2017

leveraged loan default rate and projection

Market participants expect the U. S. leveraged loan default rate to continue to grind higher over the next 12 months as the credit cycle ages and commodity-related credits struggle.

According to LCD’s latest quarterly buyside survey conducted in early June – before the Brexit vote, of course – managers, on average, expect the default rate by principal amount to climb from May’s reading of 1.96% to 2.70% by the end of June 2017 and to 3.09% by the end of next year. The views ranged from 1.65–3.50% by June 30, 2017 and 1.80–4.00% by the end of 2017.

When asked when the default rate is likely to push beyond the historical average of 3.1%, managers were mostly split between 2017 and 2018, with a small percentage (11%) forecasting 2019. – Kerry Kantin

You can read more on defaults here, in LCD’s Loan Market Primer/Almanac (it’s free).

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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.

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US High Yield Mart Slips Further post ‘Brexit’ Vote, But Volume Stays Light

United Kingdom high-yield credits were lower in a second-consecutive session since the Brexit-vote shock, and the U.S. followed suit again this morning, with pricing off 1–3 points across widely held credits. However, trading volume was once again fairly light, and there were mixed signals about cash flow, with both bid-wanted and offer-wanted circulars making the rounds, according to sources.

As for some of the big names trading, the Numericable 7.375% notes due 2026—at $5.19 billion the largest single tranche ever sold—this morning traded two points lower, at 95.75, for just over a four-point loss tied to Brexit adjustments, and the First Data 7% notes due 2023—at $3.4 billion the seventh-largest single issue—today has traded one point lower, at 99.5, for a net-three-point loss amid the rout.

Over in commodities, Chesapeake Energy 8% second-lien notes due 2022 were marked down at 82/84 this morning, according to sources, for nearly a six-point decline in recent days, while the Comstock Resources 10% first-lien notes due 2020 slumped three points, to 76.5/79.5, for approximately a five-point decline over the past week.

As for recent new issues, Dell 7.125% notes due 2024 shed another full point today, to 100.5/101, for roughly a three-point decline in recent days, while Weatherford International 7.75% notes due 2021 were down by another point as well, at 94.75/95.75, according to sources. Take note that both were originally issued at par three weeks ago.

In the synthetics market, the unfunded HY CDX 26 index slipped three-eighths of a point, to a 101.375 context. This is down 1.2% week-over-week and marks a three-month low dating to the twice-annual series rollover adjustment on March 28. — Matt Fuller

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

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.

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Europe’s CLO Market Keeps Calm After Brexit, Prepares for Challenges Ahead

Instead of waking up to the prospect of buoyant markets, and the expectation that primary activity would restart in the wake of a Remain vote in yesterday’s referendum, CLO players were instead rudely awakened with the early morning news that the U.K. has voted to leave the European Union.

Now all bets are off when it comes to primary issuance as players try and make sense of the outcome, and figure out their next steps. And the handful of managers — Accunia among them — who were gearing up to price deals will likely have to wait and see how investors react.

European CLO issuance

That’s a deep shame, given how the market had recovered from the troubles of the first quarter. Had the vote gone the other way, June could have notched up the highest tally of CLO issuance this year, with several more transactions gearing up to price this month.

Month-to-date issuance currently stands at €1.64 billion, while year-to-date issuance stands at €7.21 billion, according to LCD, an offering of S&P Global Market Intelligence.

There was a clear sense of shock among market players this morning, but while some have forecast the migration of key asset manager operations to Ireland and/or the Continent, for the majority it is far too early to draw any conclusions, especially given the perceived length of any Brexit process. Instead, most prefer to focus on the positives — and perhaps dealing with so many regulatory knockbacks over the years has embattled them. A period of uncertainty and primary market standstill is inevitable, but that there are many reasons why issuance should resume again.

The fact that U.K. corporates form a smaller share of the European CLO market is a positive factor in the event of a U.K. recession. J.P. Morgan CLO research analysts estimated in February that European CLO 2.0s hold roughly 13.2% in U.K. assets, while Citi’s CLO research analyst Ratul Roy in a client Credit Flash today puts the average U.K. corporate risk at roughly 11% of a typical portfolio. Roy does, however, note that two of the five sectors these U.K. assets are concentrated in are retail and banking, which are likely to be more volatile than the other three — namely chemicals, food & beverage, and hotel & leisure.

Primary spreads, having marched all the way in to E+128 at the AAA level, are expected to widen again, which could impact arbitrage, although on the asset side presumably the news will stem further opportunistic transactions in the loan market. “Long-run demand will be driven by how much CLO spreads widen relative to loan spreads, ie. by future arbitrage, and the default environment not worsening significantly,” said Deutsche Bank CLO research analysts in a note published last night.

Warehouses
For those with a warehouse open meanwhile, the current volatility may present a good opportunity to get ahead with the ramp via the weaker loan and bond secondary market. “If you have capacity to deploy cash, it’s a good buying opportunity. But it is hard to see any new-issue deals coming for some time,” said one manager.

Sources suggest a number of new warehouses have been signed in the run up to the vote, although others had been held back by their more cautious first-loss providers, who preferred to wait until after the referendum before committing to a new facility. “I have been quiet these past few weeks,” said one investor. “I have cash stored up ready to invest in the credit markets, but I would have just looked stupid if I put the money to work the week ahead of the vote and it went the wrong way.”

The decision to wait looks eminently sensible now, but players remain hopeful that investors will remain engaged. Ramping conditions may have improved from a secondary perspective, but the key question here is the plausibility of the CLO takeout, and how much investors are going to care now about the legal ambiguity of a manager potentially based outside the EU, versus in two years’ time, noted one manager.

CLO investors will be a key part of restarting primary, and many have money to put to work. Some, especially at the lower part of the stack, may prefer to invest in the CLO secondary, but senior paper is harder to source here. The ECB-driven hunt for yield may also keep European investors focused on the market, even if some more-conservative parties hold back.

Citi’s Roy urges caution regarding secondary opportunities, noting that European CLO holders may not have the appetite for volatility. “With dealer balance sheets likely to be constrained, spread swings are likely to be amplified across the entire stack.”

Regulation and risk retention is the other key issue — and ironically concern around Paul Tang’s STS proposals pales in comparison with the huge task of ahead from a regulatory perspective. “Even if Brexit eventually results in retention requirements not being part of U.K. laws, they still of course will apply for EU investors,” said Franz Ranero, partner at A&O. “My concern is that yesterday’s vote puts us on the back foot in the current political dialogue regarding securitisation regulation, and somehow seen as lesser stakeholders.”

U.K. CLO managers have discussed with their legal counsels the loss of passporting privileges that allow them to qualify as sponsors for risk retention, and how to alleviate any investor concern around this issue to try and help get the primary market moving.

“Expect pre-baked originator switch mechanics to be included in all sponsor structures and less focus on the Tang report,” said John Goldfinch, partner at Milbank. “Loan prices are down, so there are lots of cheap assets to purchase, and it is difficult to find a more stable product for generating real return than a CLO, so I do see some positives, oddly enough.”

The negotiation of bilateral agreements between the U.K. and E.U. concerning the CLO market is considered achievable during the two-year exit withdrawal period, given CLOs represent a key source of funding for European corporations. Meanwhile, should the U.K. successfully negotiate staying in the EFTA, then the pressure is off completely, sources said. — Sarah Husband

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US Leveraged Loan Bids Fall in Loan Secondary in Wake of Brexit

With markets globally under pressure, the secondary loan market opened lower this morning following news overnight that the U.K. voted to leave the European Union.

Traders relay that bids are down more than offers as players digest the news. Bids for certain higher-quality names appear to be off about half a point, though other loans are bid roughly a point lower, and high-beta names are off even more.

Among liquid issues, the Charter Communications I term loan due 2023 (L+275, 0.75% LIBOR floor) slid to a 99.625/100.125 market this morning, versus a 100.125/100.375 market yesterday; the Avago Technologies TLB due 2023 (L+350, 0.75% floor) was marked at 99.5/100, down from 100/100.25 yesterday; and the Community Health Systems H term loan due 2021 (L+300, 1% floor) fell to a 96.75/97.5 market, from 97.75/98.25 yesterday, sources said.

Bids are off much more appreciably for higher-beta names: the Avaya B-7 term loan due 2020 (L+525, 1% floor) was quoted at 67/70, versus 70/71 yesterday, and the J. Crew Group B term loan due 2021 (L+300, 1% floor) slumped to a 67/69 market, versus 71.25/72.75 yesterday.

Looking at some credits with European exposure, the Gates Global B term loan due 2021 (L+325, 1% floor) was quoted at 93/95, versus 95/96 yesterday, and the Samsonite TLB (L+325, 0.75% floor) was marked at 99.5/100.25 earlier this morning, versus 100.75/101.25 yesterday.

A $113.9 million BWIC that was scheduled for today is still on, though sources said that names will now trade on a first-come, first-served basis; buyers are no longer being asked to leave bids open until 1:30 p.m. EDT per the original terms. The portfolio, which is believed to be a 1.0 CLO, contains roughly 100 tranches of debt, most of which are loans, though it also contains positions in notes issued by a handful of pre-crisis CLOs as well as a few equity positions. —Kerry Kantin

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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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GoldenTree Prices $411M CLO via GreensLedge; YTD US Issuance: $24.8B

GreensLedge Capital Markets today priced a $410.95 million collateralized loan obligation for GoldenTree Asset Management, according to market sources.

Citi was the initial purchaser on the class A-1 tranche. PNC Capital Markets was also an initial purchaser.

Pricing details on the CLO are as follows:

GoldenTree CLO 2016-06-22

Up to 80% of the loans in the portfolio can be covenant-lite, according to a presale report from Moody’s analysts. Up to 30% of the assets in the portfolio are also permitted to be purchased at a discount.

The transaction will close on July 28 with a non-call period running until July 21, 2018, and the reinvestment period ending on Jan. 21, 2021. The stated maturity is on April 21, 2027.

Year-to-date issuance is now $24.8 billion from 59 CLOs, according to LCD data. June issuance is now $5.22 billion from 12 transactions. — Andrew Park

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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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Dell Software Group Nets Financing for EMC Buyout

Credit Suisse and RBC Capital Markets are providing an undisclosed amount of debt financing to back Francisco Partners and Elliott Management’s purchase of Dell Software Group, sources said.

dellPublished reports put the software unit’s purchase price at north of $2 billion. Dell Software provides advanced analytics, database management, data protection, endpoint systems management, identity and access management, Microsoft platform management, network security, and performance monitoring.

Details of the new financing haven’t emerged, but the software group’s two principal businesses, Quest Software and SonicWALL, are both well known to the leveraged finance markets.

A planned $2 billion buyout of Quest by Insight Venture Partners in 2012 was backed by an $820 million senior secured term loan, a $75 million senior secured revolving credit, and a $300 million senior unsecured bridge, all provided by J.P. Morgan, RBC Capital Markets, and Barclays. The company was later sold to Dell instead, and its purchase of SonicWALL occurred around the same time.

Credit Suisse arranged a $155 million first-lien term loan and a $105 million second-lien term loan to support the $717 million buyout of SonicWALL by an investor group led by Thoma Bravo that includes Teachers’ Private Capital back in 2010.

Dell, meanwhile, is expected to use proceeds from the asset sale to repay debt stemming from its recent acquisition of EMC Group, specifically a portion of its $3.2 billion, three-year term loan A-1, which is held by the deal’s underwriters and other commercial banks. —Chris Donnelly

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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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