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With rate-hike chances slim, leveraged loan issuers turn to high yield bond market

Borrowers are issuing fixed-rate high-yield bonds to take out floating-rate leveraged loan debt at the fastest pace since the first quarter of 2017.

Through March 14, completed bond-for-loan takeout offerings in 2019 have totaled $11.9 billion, according to LCD. With the inclusion of ADT’s pending offering, expected to launch this month, this figure edges to $12.4 billion.

The renewed emphasis on the fixed-rate high-yield asset class, at the expense of floating-rate leveraged loans, is clear via retail investor activity. So far in 2019 U.S. high-yield funds have seen a net inflow of $8.2 billion, while U.S. loan funds have seen a net withdrawal of roughly the same amount, according to Lipper weekly reporters.

Notably, retail investors have pulled money from loan funds for the past 17 weeks, totaling nearly $22 billion.

Before the recent retail retreat from the U.S. leveraged loan market, interest rates had been rising, benefiting the floating rate asset class. Market observers do not expect another rate hike in 2019, according to CME group. — Jakema Lewis

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Private equity stalwart Lee, leveraged loan vet Gleysteen team for AGL, with eye on CLO mart

AGL Credit Management is a private credit firm specializing in bank loans that has been launched by Peter Gleysteen, who will serve as both the Chief Executive Officer and Chief Investment Officer, as well as Thomas H. Lee, who will be a non-executive chairman.

AGL also intends to build out a CLO franchise, joining other firms that recently established a platform, including Elliott Management; HalseyPoint Asset Management; and LibreMax, through its acquisition of Trimaran Advisors.

The Abu Dhabi Investment Authority (ADIA), the sovereign wealth fund managing around $800 billion, and an unnamed U.S. state pension fund have committed $650 million in equity for AGL Credit, in addition to the family office of Thomas H. Lee, who has also made an investment.

Gleysteen had previously founded CIFC Asset Management, the now $13 billion credit manager where he was CEO from 2005 to 2014.

Lee is a Chairman at Lee Equity Partners and was previously the Chairman and CEO of Thomas H. Lee Partners, which was established in 1974 and has since invested over $10 billion across 100 different transactions. – Andrew Park

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SS&C Technologies ups $750M high yield bond offering to $2B

SS&C Technologies has priced $2 billion of 8.5-year unsecured notes at the tight end of talk, sources said. The offering was upsized from $750 million, and marketed via joint bookrunners for the deal were Morgan Stanley, Credit Suisse, Citi, BAML, and Oppenheimer. Proceeds will be used to repay a portion of existing term loans under the company’s senior secured credit facilities. S&P Global Ratings views the transaction as leverage neutral. SS&C Technologies (Nasdaq: SSNC) provides software products and software-enabled services to financial services providers. Terms:

Issuer SS&C Technologies
Ratings B+/B2
Amount $2 billion
Issue Senior (144A/Reg S for life)
Coupon 5.5%
Price 100
Yield 5.5%
Spread T+291
Maturity Sept. 30, 2027
Call non-call three (first call @ par +75% coupon)
Trade March 14, 2019
Settle March 28, 2019 (T+10)
Joint bookrunners MS/CS/C/BAML/Oppenheimer
Talk 5.5-5.75%
Notes Upsized frpm $750 million; up-to-40% equity claw @ 105.5 until March 30, 2022; make-whole @ T+50; change of control put @ 101

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US Leveraged Loan Funds See $606M Withdrawal as Outflow Streak Hits 17 Weeks

Retail investors withdrew $606 million from U.S. loan funds during the week ended March 13, the seventeenth straight outflow for a total of $21.8 billion over that span, according to Lipper.

The withdrawal is the largest in four weeks, halting a short trend of dwindling outflows, including a small $33 million retreat two weeks ago.

Mutual funds were the main culprit this week, with a $503 million net outflow, while loan ETFs saw a $103 million withdrawal. The change due to market conditions during the week was a negative $125 million. The four-week average is now a $410 million outflow.

Year to date, including the week ended Jan. 2, retail investors have withdrawn a net $8.3 billion from U.S. loan funds (that’s nearly the opposite number for U.S. high-yield funds, which so far in 2019 have booked a net inflow of $8.2 billion, by the way).

Assets at the loan funds now total $86 billion, of which $10 billion come via ETFs, according to Lipper.

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Frontier Communications talks pricing on $1.65B secured high yield offering

Frontier Communications (Nasdaq: FTR) has set talk for a $1.65 billion offering of eight-year (non-call three) first-lien secured notes in the 8% area, sources said. Books for the deal were set to close today.

Bookrunners for the deal are J.P. Morgan, Citi, Credit Suisse, Goldman Sachs, Morgan Stanley, Barclays, Bank of America Merrill Lynch, Deutsche Bank, and Mizuho. Initial price thoughts circulated at 8–8.25%, sources noted. These new notes will serve as the issuer’s inaugural first-lien, fixed-rate print.

Proceeds are earmarked to repay $1.4 billion and $239 million outstanding A term loan facilities due in 2021. Additionally, the borrower also intends to extend the maturity of at least $835 million of its $850 million revolving credit facility by two years, from 2022 to 2024.

Analysts at research firm CreditSights on March 12 noted that while the refinancing will “materially improve Frontier’s runway through 2021,” the company’s interest expense could increase by $30–40 million per year pro forma for this refinancing, and the issuer’s 7.125% senior notes due 2019, which CreditSights expects will be repaid using a mix of revolver borrowings and cash on hand.

Ratings have been assigned as B/B2, with a 1 recovery rating from S&P Global Ratings. Analysts at S&P Global Ratings view the transaction as leverage-neutral, but maintain a negative outlook at the borrower on expectations it “will be unable to address its longer-dated unsecured debt maturities when they come due absent favorable business, economic, and financial conditions because of its lack of secured debt capacity, low free operating cash flow, and elevated leverage,” a March 12 report noted. Moody’s has a stable outlook for the company.

Frontier Communications is a Norwalk, Conn.–based provider of communications services, offering data, video, and voice packages for residential and business customers. As of Dec. 31, 2018, total debt at the company was $17.2 billion, according to S&P Global Market Intelligence. — Jakema Lewis/Nina Flitman

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US high yield funds see $1.9B withdrawal, snapping inflow streak

Retail investors pulled $1.9 billion from U.S. high-yield funds in the week ended March 6, putting an abrupt end to five weeks of inflows totaling $5.6 billion, according to Lipper.

With the recent activity, the four-week average dips to a $49 million outflow, from a $1.4 billion inflow last week.

ETFs took the bigger hit, with a $1.3 billion outflow, according to Lipper weekly reporters. High yield mutual funds saw $582 million of withdrawals. The change due to market conditions was positive $224 million during the week.

Since the first full week of January, net inflows to U.S. high yield funds total $7.8 billion. Assets at the funds stand at $199 billion, $43 billion of which come via ETFs. — Staff reports
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US CLO Issuance Tops $13B in February

Following an active February, with over $13 billion in U.S. CLO issuance, many  managers are still finding different avenues to work their way out of their warehouses, some of which are still underwater despite the ongoing recovery in loan prices from December (Through the first two months of 2019 U.S leveraged loans returned 4.18%).

Year to date, U.S. CLO issuance totals $18.79 billion, compared to $21.37 billion at this point last year, according to LCD. Of course, 2019 finished with a record $128.9 billion in issuance.

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Neiman Marcus restructuring sees MyTheresa stake for noteholders

Neiman Marcus has reached an agreement in principle with its creditors on the terms of a restructuring deal that the company said would provide it with a three-year runway to “execute on and complete its transformation plan into a customer-centric luxury platform,” including a partial pay-down of the company’s term loan, an extension of remaining term loan debt, and the distribution of a preferred equity stake in the contested MyTheresa unit to unsecured bondholders pursuant to a notes exchange.

The troubled retailer, represented by Lazard and Moelis, ironed out an amend-to-extend transaction to lengthen the maturity of its $2.8 billion covenant-lite B term loan due October 2020 (L+325, 1% LIBOR floor)—its first large maturity—by three years, to 2023, according to cleansing documents filed with the SEC to lift trading restrictions.

Under the deal, lenders have the option to extend into one of two tranches paying either L+650 or L+550/100 PIK. Both carry a 1.5% LIBOR floor.

A $550 million partial pay-down of the term loan, meanwhile, would be funded by new second-lien notes that would be collateralized by a partial guarantee from MyTheresa of $200 million. The new second-lien notes would pay 8% cash/6% PIK and mature in April 2024.

The issuer also has the option to propose up to $250 million of additional par pay-downs from real estate transactions, subject to a majority term lender vote. Further amendments to the term loan that tighten a series of covenants related to debt baskets would also place limitations on dealings with MyTheresa.

A 125 bps fee would be paid in cash upon closing of the transaction to those lenders that agree to non-disclosure agreements through and sign on to a restructuring support agreement by March 12, while a 25 bps fee would be paid to term lenders that sign on to the RSA within five days of the announcement of the execution of the agreement.

Unsecured noteholders would exchange $250 million into a par amount of MyTheresa 10% cumulative preferred equity, with the balance of their holdings exchanged into new third-lien notes due 2024, along with a first-lien on PropCo assets and a first-lien on 50% of MyTheresa common equity.

The restructuring sets out a waterfall payment plan for MyTheresa that places the $200 million reserve for the second-lien notes guarantee first, followed by $250 million for the preferred equity issued to exchanging noteholders, $250 million for preferred equity issued to sponsors, and lastly common equity, with 100% of the proceeds from the unsecured noteholders’ share of the common equity used to pay down the third-lien notes at par.

The agreement was reached with an ad-hoc committee of holders of the company’s unsecured 8.750%/9.500% senior PIK toggle notes due 2021, and the company’s unsecured 8.000% senior cash-pay notes due 2021, as well as an ad hoc committee of term loan lenders. The agreement is subject to the completion of all documentation, the company said, adding that all term loan lenders and all but one of its noteholders in those ad hoc groups have agreed to extend confidentiality agreements through March 12, with the one dissenter’s objection based on naming Neiman Marcus Group LLC as a co-issuer of the company’s debt, rather than a substantive objection to the terms of the transaction.

The bondholder group is working with Houlihan Lokey as financial adviser, filings show.

Neiman also disclosed that it expects to report an increase in comparable revenue on a U.S. basis of 0.5% to 1.0% for the second fiscal quarter ending January 2019 from the year-ago period, representing the sixth consecutive quarter of comparable revenue increases. In addition, year-to-date Adjusted EBITDA through the second quarter of fiscal year 2019 is expected to be generally consistent with previously disclosed expectationsThe MyTheresa issue.

The agreement to partially return MyTheresa collateral shows a bit of a U-turn by the issuer, which previously dug its heels in over the luxury fashion brand, a stance that became a point of a contention after the asset was put out of the reach of creditors via a transfer to a subsidiary sitting directly under the parent company.

Distressed investing fund Marble Ridge Capital in December asked a Dallas court to appoint an equity receiver to request the return of the MyTheresa brand after it sent a letter to Neiman’s board in September claiming that the action constituted a default. Neiman Marcus fought back at the claims, filing its own lawsuit for “damages resulting from a series of false statements that Marble Ridge Capital has made publicly about the company,” and requesting the case be dismissed. A judge last month granted Marble Ridge discovery with respect to claims from Marble Ridge that the loan agent blocked the fund from obtaining a position in the debt.

With respect to claims of default, the restructuring could block these objections, according to the term sheets, which require lenders to waive any existing defaults.

Today’s proposed restructuring proposal, however, was not enough to sway Marble Ridge to the company’s side.

“Your [p]roposal’s’ request for bondholders to waive their claims against you and the sponsors arising out of your misconduct is nothing more than a transparent attempt to insulate yourselves from liability,” Marble Ridge said in a statement today. Marble Ridge said it is “confident” that the [court] discovery will confirm the company’s “scheme to strip value away from creditors to benefit out-of- money sponsors.”

Neiman Marcus has $4.3 billion of debt outstanding, including the $2.8 billion covenant-lite B term loan due October 2020 (L+325, 1% LIBOR floor), $659 million of 8.75%/9.5% PIK toggle notes due 2021, and $960 million of 8% cash-pay notes due 2021.

The term loan was marked at 95/96, from 92/93 yesterday. The PIK toggle notes due 2021 rallied seven points, to 59.5. The 8% cash-pay notes due 2021 traded also to 59.5, up 7.5 points. — Rachelle Kakouris

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Investor Pour $698M More Into US High Yield Funds

Retail investors poured another $698 million into U.S. high yield funds for the week ended Feb. 27, the fifth straight net inflow totaling $5.64 billion, according to Lipper weekly reporters.


As in the leveraged loan segment, ETFs were the main driver, accounting for $682 million of the inflows. Mutual funds saw $15.7 million of inflows, according to Lipper.

With the recent activity the four-week average is positive $1.4 billion, up slightly from the previous week. The change due to market was positive $810 million.
Since the first full week of January U.S. high yield funds have seen net inflows of $9.7 billion. Assets at these funds now total $200 billion, of which $44.6 billion come via ETFs. — Tim Cross

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US Leveraged Loan Default Rate Rises to Still-Low 1.62% in February

The default rate of the S&P/LSTA Leveraged Loan Index climbed to 1.62% in February, from a 17-month low of 1.42% in January, after Windstream Holdings and Ditech filed petitions for bankruptcy protection in the Southern District of New York.

By issuer count, the default tally is now 1.52%, up from a 15-month low of 1.44% last month.

Leading February’s defaulters by size, Windstream Holdings made a quick dash to Chapter 11 without a confirmed restructuring plan after a federal court ruled against the company in its long-running battle with Aurelius Capital Management over covenant default claims.

Despite the increase, the default rate remains well below the 3.1% historical average.

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