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US Leveraged Loan Maturity Wall – Nothing to See Here (until 2023)

With the U.S credit market creaking loudly in December – before rebounding somewhat in January –  leveraged loans once again were thrust into the spotlight, with observers citing loosening underwriting standards and the massive amount of outstandings as areas of special interest.

While those are legitimate concerns, the defaults that can mount as credit cycles deteriorate might have to wait a while this time around.

While the U.S. leveraged loan market now totals some $1.15 trillion in outstanding debt, relatively little of it will come due over the next few years, as borrowers have taken full advance of an accommodating market in 2017 and 2018 to lock in thinly priced debt.

Indeed, this year there’s but a scant $8 billion of U.S. leveraged loans that will mature, according to LCD. That number was roughly $44 billion as of December 2017, though refinancings and repricings reduced that amount dramatically.

Loan maturities step up a bit in 2020, to $25 billion, and to $69 billion in 2021. But it’s not until 2022 when maturities really start to kick in, with $118 billion due. Maturities peak in 2025 – seven years from now, or the length of some credit cycles – when there is $351 billion due.

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Targa Resources Inks $1.5B High Yield Bond Offering

Targa Resources Partners has completed a $1.5 billion, evenly split, two-part offering of senior notes via lead Bank of America Merrill Lynch, sources said. The originally proposed 8.5-year bonds priced at the tight end of talk, while the 10-year maturity, which was added following strong investor demand and upsized by $250 million, priced at the middle of talk. The transaction ended a dry spell for U.S. high-yield issuance, which saw a print-free December 2018 due to an extended wave of market volatility.

Proceeds are earmarked for the full redemption of the issuer’s outstanding 4.125% notes due 2019, and for general partnership purposes, which may include repaying borrowings under its credit facilities or other debt, working capital, and funding growth investments and acquisitions. The issuer had last come to market in April 2018, when it placed $1 billion of 5.875% notes due 2026. Targa Resources Partners LP, a subsidiary of Targa Resources (NYSE: TRGP), owns, operates, acquires, and develops midstream energy assets in the U.S. – Jakema Lewis

Issuer Targa Resources Partners
Ratings BB/Ba3
Amount $750 million
Issue Senior (144A/ w. contingent reg. rights)
Coupon 6.5%
Price 100
Yield 6.5%
Spread T+381
Maturity July 15, 2027
Call non-call 3.5 (first call @ par 75% coupon)
Trade Jan. 10, 2019
Settle Jan. 17, 2019 (T+5)
Joint bookrunners BAML/JEFF/WF/CAPONE/GS/TD
Co-lead managers ABN/BBVA/ING/MUFG/Scotia/SMBC
Co-managers BB&T/BMO/CIBC/Citizens/FifthThird/USBank
Talk 6.625% area
Notes Make-whole  @ T+50; change of control put @ 101; up-to-35% equity claw @ 106.5 until Jan. 15, 2022
Issuer Targa Resources Partners
Ratings BB/Ba3
Amount $750 million
Issue Senior (144A/ w. contingent reg. rights)
Coupon 6.875%
Price 100
Yield 6.875%
Spread T+415
Maturity Jan. 15, 2029
Call non-call 5 (first call @ par +50% coupon)
Trade Jan. 10, 2019
Settle Jan. 17, 2019 (T+5)
Joint bookrunners BAML/JEFF/WF/CAPONE/GS/TD
Co-lead managers ABN/BBVA/ING/MUFG/Scotia/SMBC
Co-managers BB&T/BMO/CIBC/Citizens/FifthThird/USBank
Talk 6.875% area
Notes Upsized from $500 million; up-to-35% equity claw @ 106.875 until Jan. 15, 2022

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With 4Q Sell-off, Leveraged Loan Prices See Even Distribution

bid distribution

The late-year selloff in the U.S. leveraged loan market has uprooted a dynamic that has dominated the asset class for most of 2018: Precious few bargains in the trading market, as most debt offered to investors was priced at 100 cents on the dollar, or higher.

Now, after broader economic concerns in December grounded the high-flying market, loan bids are more evenly dispersed across various pricing levels, with some market pros seeing opportunity.

To be sure, loan prices have defied gravity until recently. Even at the end of 2018’s second quarter—following a period of excess supply in market, when the share of par-plus deals fell below 30%—half of the issues comprising the S&P/LSTA Loan Index remained in a lofty 99-to-100 price level. And by the end of September the market had strengthened, with 64% priced over par and 19% at 99-par, according to the Index.

Following the November/December sell-off, however, the pricing distribution resembled a bell curve, with only the 95–96 category accounting for more than 20% of the Index, and the bulk of constituents bid between 95 and 99. Less than 1% of loans belonged to the par-plus bucket, the lowest such share since April 2009.

While there remains concern about the sudden slide, a number of market players note that the newfound pricing distribution can be seen as something approaching normal, compared to an asset class were pretty much every issue is skewed toward par, perhaps indiscriminately.

One CLO manager, for example, deemed the recent market move as a “healthy repricing of risk,” while another said they had been finding better opportunities across the leveraged loan secondary over the past month or so.

CLOs, or collateralized loan obligations, are the biggest investor component of the roughly $1.15 trillion U.S. leveraged loan market (that number excludes revolving credits and amortizing term loans, which are syndicated to banks).

How long this newfound pricing dynamic holds remains to be seen. So far this year U.S. leveraged loans have rebounded 1.21% – a spectacular jump for asset class – though longer-term, market players continue cautious, especially as the prospects of additional interest rate hikes lessen and the effects of the market’s considerable covenant-lite outstandings loom.

This analysis was taken from LCD News stories written by Marina Lukatsky, Andrew Park and Tyler Udland.

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S&P Global Ratings Chops Oil-Price Assumptions Through End of Decade

S&P Global Ratings last week announced cuts to its annual price assumptions for Brent and West Texas Intermediate (WTI) crude oil, providing a sobering counterpoint to news today of reduced supply from OPEC nations.

The new assumptions are for $55/bbl for Brent and $50/bbl for WTI in 2019, respectively, or down $10/bbl from prior assumptions. The agency as well trimmed $5/bbl from its 2020 assumptions, also to $55/bbl and $50/bbl, respectively. Its view for 2021 and beyond is at $55/bbl for both Brent and WTI.

“It was just a few months ago that oil market soothsayers were calling for oil to reach $100/bbl,” S&P Global Ratings stated today. The abrupt reversal from that view—as prognosticators now countenance the potential for low $40/bbl in the near-term—reflects the ongoing trade war and news of China’s economic slowdown, and oversupply exacerbated by shale plays and gaping loopholes to sanctions on Iran’s oil exports.

High-yield energy credits posted strong gains this week from the December lows as crude prices found support on the heels of big trailing losses, and as Saudi Arabia and other OPEC constituents appeared to make quick moves to curtail supply in defense of prices. Bonds backing EnscoCalifornia ResourcesNobleTransocean, and Weatherford International were up 4–6 points this morning from the final trades of 2018.

LCD’s Marty Fridson today noted that October and November’s worst-performing major industry, Energy, finished dead last again in December, with a negative 3.95% return as oil prices tumbled. “In the first nine months of 2018, Energy outperformed the ICE BAML High Yield Index by 1.25 percentage points. Following the disastrous fourth quarter, however, Energy ended the year at –6.37%, versus –2.27% for the overall index,” Fridson noted.

The year’s worst performer, though, was Automotive & Auto Parts, at –8.31%. Healthcare was the strongest performer, with a 1.53% gain for all of 2018. — John Atkins

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Amid Credit Rebound, US Leveraged Loan Prices See Record Gains

The U.S. leveraged loan asset class, which just stumbled through its worth month in seven years, saw a record one-day gain on Friday, with the S&P/LSTA Loan Index advancing 0.94%.

That movement marks a dramatic whip-saw for loans, which have seen a rout over the past two months as fears of a broader economic slowdown took root. On Friday, however, at least two high-profile economic yardsticks buoyed the financial markets, as the December jobs report of plus 312,000 topped expectations, as did wage growth of 3.2%.

The 0.94% gain in loans was more than twice the prior record, a 0.46% advance on Dec. 18, 2014, amid a volatile period for the asset class, due in part to plunging oil prices.

To put Friday’s gain in perspective, U.S. leveraged loans lost a total of 2.54% in December, helping wipe out advances seen throughout the year. For all of 2018 leveraged loans returned 0.44%, the third-worst showing since the inception of the S&P/LSTA Index, 19 years ago.

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Amid New-Issue Drought, US High Yield Market Shrinks for 3rd Straight Year

In a little-heralded yet noteworthy development, the amount of outstanding U.S. high-yield debt declined for an unprecedented third year in a row in 2018. The face value of the ICE BofAML U.S. High Yield Index finished the year at $1.231 trillion. That was down from $1.283 trillion on Dec. 31, 2017. The 2018 year-end figure was 8.2% below the all-time year-end peak of $1.341 trillion in 2015.

Several forces drive year-to-year changes in the amount of outstanding high-yield debt.

These include both additions, i.e., new issuance (net of bond refinancing) and downgrades from investment-grade (“fallen angels”), and subtractions, i.e., maturing issues, partial redemptions, defaults, and upgrades to investment grade*.

An important factor in the most recent shrinkage was a decline in new issuance, due in substantial part to the diversion of primary activity to the leveraged loan market. At $169 billion, U.S. high-yield volume was the lowest full-year figure since 2009, according to LCD. The peak of $345 billion was recorded way back in 2012. – Martin Fridson

* Bonds are removed from the index depicted in the chart when their remaining life shortens to less than one year. Defaulted issues remain speculative-grade (D by S&P Global Ratings) but exit the index by virtue of turning from high-yield to no-yield bonds.

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US High Yield Funds Finish 2018 with Hefty $4B Retail Investor Withdrawal

high yield funds

U.S. high-yield funds wrapped up a grim 2018 with a $3.94 billion withdrawal for the week ended Dec. 26, bringing the full-year outflow figure to a whopping $35.3 billion, according to Lipper weekly reporters.

With the most recent withdrawal, the four-week trailing average steepens to a $1.9 billion outflow.

The retail activity was evenly split across the asset class, with high-yield funds accounting for $1.98 billion of outflows and ETFs accounting for a $1.96 billion withdrawal.

U.S. high-yield assets now stand at $179.5 billion, of which $36.9 billion come from ETFs. — Tim Cross

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US Leveraged Loans Return Slim 0.44% in 2018, tho Best Other Asset Classes

To be sure, it was risk-off in December, with increasing signals of instability creeping into the political and economic scenarios (and with a less-bullish picture emerging, as far as rate hikes are concerned). The rout was most pronounced in equities (down 9.03%) and in U.S. leveraged loans (a 2.5% loss, which is unusually large for the asset class), with high yield bonds sliding a not insignificant 2.19%.

Predictably, higher-quality assets fared better, with 10-Year Treasurys gaining 3% and investment-grade corporate bonds returning 1.5%.

For the full-year 2018, U.S. leveraged loans outperformed the other asset classes tracked for this analysis, even with a dismal 4Q showing. The 0.44% return was the only asset class in the black for the year, with only Treasurys coming close (negative 0.03%).

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US Leveraged Loan Funds See Another Record Withdrawal

leveraged loan funds

U.S loan funds saw yet another record outflow during the week ended Dec. 26, as retail investors withdrew $3.53 billion, according to Lipper weekly reporters.

That’s the sixth straight substantial outflow, totaling a massive $13.5 billion, punctuating a staggering turnaround for the asset class. Before that withdrawal streak, U.S. loan funds and ETFs had seen some $10.3 billion of net inflows. For 2018, then, the final figure will be a net outflow of $3.1 billion, according to Lipper.

The most recent activity brings the four-week trailing average to a $2.6 billion outflow.

Loan funds accounted for $2.9 billion of this week’s outflow, while ETFs accounted for a $626 million outflow. The change due to market value was negative $746 million.

With the withdrawal, loan fund assets have dropped to $90.7 billion, including $9.8 billion from ETFs, says Lipper. — Tim Cross

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Retail Investors Withdraw Record $3.3B from US Leveraged Loan Funds

loan fund flows

U.S. loan funds reported an outflow of $3.29 billion for the week ended Dec. 19, according to Lipper weekly reporters only. This is once again a record outflow for loan funds, easily surpassing last week’s $2.53 billion exit. Prior to that, the next largest outflow was back in August 2011 at negative $2.12 billion.

This is also the fifth consecutive week of withdrawals, totaling roughly $9.9 billion over that span. The four-week trailing average is now $2.05 billion, from negative $1.66 billion last week.

Mutual funds were tapped for a net $3 billion during the observation period, while a comparatively light $298.5 million was pulled from ETFs.

Outflows have now been logged in seven of the last nine weeks and that has taken the year-to-date total inflow to just $406 million, after cresting $11 billion in October.

The change due to market conditions last week was a decrease of $772.7 million, milder than last week’s $1.231 billion drop, which was the largest in four years. Total assets were roughly $95.3 billion at the end of the observation period and ETFs represent about 10% of that, at roughly $10.5 billion. — Jon Hemingway

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