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LCD’s estimate of loan fund flows (8/27): -$111M Lipper/-$156M total

On Thursday, Aug. 27, outflows from loan mutual funds totaled an estimated $111 million based on the Lipper FMI universe of weekly reporters, or $156 million based on the total universe of open-ended funds plus ETFs, versus outflows of $113 million/$143 million on Wednesday, Aug. 26.

For the five business days ended Aug. 27, outflows totaled $933 million (Lipper FMI universe) and $1.21 billion (total universe plus ETFs), versus outflows of $783 million/$979 million during the five business days ended Aug. 20.

Methodology:

LCD compiles these data with the cooperation of a number of mutual-fund complexes. LCD is collecting daily fund-flow data for a representative sample of loan funds. We then take the weighted average AUM change each day from contributors and extrapolate it to:

  • the Lipper FMI AUM universe of $83.9 billion (as of Aug. 26) to provide a “Lipper-style” daily reading of inflows/outflows, and
  • the entire open-ended loan universe of $117 billion to give a fuller view of estimated inflows/outflows.
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DigiCert secures debt financing to back buyout by Thoma Bravo

Jefferies and Fifth Street Asset Management agreed to provide the debt financing for Thoma Bravo’s majority acquisition of DigiCert from TA Associates. Details of the acquisition and the financing were not disclosed.

TA Associates, which bought the company in 2012, will retain a minority stake in the business.

DigiCert, based in Lehi, Utah, provides SSL certificates and SSL management tools for small and large companies in various industries. The company provides digital certificates to over 15,000 customers in more than 180 countries. – Jon Hemingway

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Prospect Capital investment in USG Intermediate outlined in 10-Q

Prospect Capital’s investment in USG Intermediate in the recent fiscal quarter included a $21.6 million L+650 (1% LIBOR floor) term loan A due 2020 and a $21.7 million L+1,250 (1% LIBOR floor) term loan B due 2020, a 10-Q showed.

USG Intermediate received a total of $48.5 million of first-lien term loans and a revolver from Prospect Capital in the June quarter. The investment included equity.

At closing of the deal, $43.5 million of the debt was funded. Proceeds were for business expansion.

USG Intermediate is a direct marketing company that uses direct mail, print media, digital media, television direct response, and telemarketing channels to sell collectible items.

Prospect Capital, a BDC, lends to and invests in privately held middle-market companies. Shares trade on the Nasdaq under the ticker PSEC. – Abby Latour

Follow Abby on Twitter @abbynyhk for middle-market deals, leveraged M&A, BDCs, distressed debt, private equity, and more.

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American Seafoods recap leveraged loan a big catch for BDC Ares Capital

Ares Capital earlier this month closed an $800 million loan financing for American Seafoods Group (ASG) in what is the latest example of a non-regulated arranger stepping in to capture business typically in the realm of large banks.

As part of a recapitalization of ASG, the Nasdaq-listed BDC recently closed a $540 million first-lien term loan due August 2021 (L+500, 1% LIBOR floor) and a $200 million second-lien term loan due February 2022 (L+900, 1% floor). A $60 million revolving credit rounded out the financing.

One of the main themes in the loan market this year is the effort by non-traditional arrangers to capture business that is outside of the parameters of the leveraged lending guidelines. While BDCs are increasingly leading larger deals, a transaction of this size for a seasoned borrower of the broadly syndicated loan and high-yield markets is a unique event.

The company’s existing loans dated to a 2011 refinancing in which ASG placed a $281.5 million B term loan due 2018 (L+300, 1.25% floor) via Bank of America Merrill Lynch, Wells Fargo and DnB NOR. It came alongside a $100 million TLA and an $85 million, five-year revolving credit. The company’s last foray into the high-yield market was in 2010 with $275 million of 10.75% subordinated notes due 2016 and $125 million of 15% senior holdco PIK notes due 2017, also via leads Bank of America Merrill Lynch and Wells Fargo. The RC and TLA had springing maturities to November 2015 if the senior subordinated notes remained outstanding.

For ASG, this new deal is a deleveraging event. In addition to refinancing the existing bank debt, the company executed a distressed exchange of its PIK notes, offering cash or equity, and received an equity infusion from private equity firm Bregal Partners and an industry group led by family-owned Pacific Seafoods. According to S&P, the company cut its overall debt burden from $911 million as of June 30.

The deal was complicated by several moving parts and a short timeline, playing to the strength of a BDC that can tailor its investment. It also helps the syndication process when the lead arranger is willing to hold a large piece of the deal, sources said. In this case it might represent as much as 25% of the total commitment. Ares is understood to have taken down $100-200 million across the first- and second-lien tranches.

Still, there were between 20-30 lenders in the group. They included similar alternative-asset managers alongside some foreign banks, sources note. Some existing investors rolled into the new deal.

Tackling a transaction of this size might not be a normal event for Ares Capital but the lender will seek similar opportunities to underwrite and syndicate larger transactions, particularly now that its joint venture with GE Capital was discontinued (Senior Secured Loan Program). “It’s not difficult for us with our capital base to underwrite deals of up to $500 million,” Ares Capital’s CEO Kipp deVeer told LCD, “Strategically, to do one or two of these a quarter would be fantastic.”

Following completion of the loan transaction agencies assigned ratings of B+/B2 to American Seafoods Group’s first-lien facility, with a recovery rating of 1 from S&P. The second-lien came in at CCC+/Caa2, with a recovery rating of 5. Corporate ratings are B-/B3, with stable outlooks from both. – Jon Hemingway

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Cruel summer: Loan bids end August in red as losses deepen

After drifting lower throughout the month, the average bid of LCD’s flow-name composite took a harsher fall in today’s reading, dropping 51 bps to 98.15% of par, versus the previous reading of 98.66 on Aug. 19.

Today’s drop is the steepest since December 2014, though note it is a week-over-week observation (the flow-names will return to the regular twice-weekly Tuesday/Thursday schedule after Labor Day).

While the flow-name composite had been steadily declining throughout August – there is not one single positive reading this month – declines accelerated in today’s reading. Equities have tumbled in very volatile trading in recent days as concerns about China’s economy have intensified.

Among the 15 names in the sample, 14 declined, and one advanced from the prior reading. Posting by far the steepest loss was the B-/B3 Avaya B-7 term loan due 2020 (L+525, 1% LIBOR floor), which is bid 3.75 points lower, at 84.25. Though there’s no news specific to the credit this week, higher-beta loans and those in out-of-favor sectors have well underperformed the broader market during this recent patch of volatility. By contrast, no other loan moved more than half a point, and excluding Avaya, the average bid would be down 28 bps.

Overall, lower-rated loans under performed: the nine loans in the sample rated B+ or higher, on average, declined 23 bps, to 99.31; the six loans rated B or lower, on average, fell 91 bps, to 96.42.

With a 0.52% drop, loans have held up well as compared with other asset classes in recent sessions. The average bid of the flow-name bond composite fell 94 bps, or 0.96%, over the week, to 96.78% of par, while even with today’s rebound, as of about 2:30 p.m. EDT, the S&P 500 had tumbled nearly 8.6% from the Aug. 19 close of 2,079.61.

Nevertheless, a 51 bps drop is nevertheless a significant move for the typically more stable loan asset class, and pushes the spread to maturity implied by the average bid out to L+430.9, which is 12.6 bps wider than a week ago, 34.7 points wider than the end of July and at its widest level since the end of December. The average bid, meanwhile, is at its lowest level since Jan. 6 (Note there have been some changes to the sample this year, so these are not apples-to-apples comparisons).

Overall, LCD’s flow-name bid declined a total of 1.51 points (1.51%) over the course of the month, down from 99.65 in the final July reading. High-yield and equities suffered a worse drubbing – the average flow-name bond composite slid 2.77 points (2.78%) during the month, while as of just after 2:30 p.m. EDT, the S&P 500 was on track to well underperform both loans and high-yield, off over 9.6% from the July 31 close of 2,103.84.

Given the wild swings in equities in recent days, arrangers and issuers will wait to see what the next 1.5 weeks bring, but the data above indicate that clearing yields are bound to widen when the primary market gets back to business after Labor Day. Market participants are also keeping a close eye on how the recent volatility – and the ensuing expectations that a September rate hike is no longer in the cards – will impact loan funds, which have seen outflows accelerate in recent days. LCD data project, per the Lipper sample of weekly reporters, for the five business days ended Aug. 25, outflows totaled $1.01 billion. As for CLOs, the recent weakness in the secondary creates a buying opportunity for managers, but liabilities could widen as well.

With the average loan bid sinking 51 bps, the average spread to maturity jumped 13 bps, to L+431.

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

  • 99.31/L+375 to a four-year call for the nine flow names rated B+ or higher by S&P or Moody’s; STM in this category is L+371.
  • 96.42/L+535 for the six loans rated B or lower by one of the agencies; STM in this category is L+506.

Loans vs. bonds
The average bid of LCD’s flow-name high-yield bonds plunged 94 bps, to 96.78% of par, yielding 7.65%, from 97.72 on Aug 19. The gap between the bond yield and discounted loan yield to maturity stands at 339 bps. – Staff reports

To-date numbers

  • August: The average flow-name loan decreased 150 bps from the final July reading of 99.65.
  • Year to date: The average flow-name loan increased 123 bps from the final 2014 reading of 96.92.

Loan data

  • Bids slip: The average bid of the 15 flow names tumbled 51 bps, to 98.15% of par.
  • Bid/ask spread wider: The average bid/ask spread widened one basis point, to 38 bps.
  • Spreads gain: The average spread to maturity – based on axe levels and stated amortization schedules – climbed 13 bps, to L+431.
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High yield bond prices fall to 2015 low; California Resources leads decliners

The average bid of LCD’s flow-name high-yield bonds declined 94 bps in today’s reading, to 96.78% of par, yielding 7.65%, from 97.72% of par, yielding 7.42%, on Aug. 19. There were 10 decliners and just one gainer, with four of the 15 constituents unchanged.

Today’s decline comes after a modest 25 bps advance in last week’s reading, and it is the fourth decline in five readings. Take note that this is a seasonal once-a-week observation, so it’s covering five sessions, rather than three. Next week, the measurement will be also be week-over-week.

Today’s decline was led by a loss of 4.5 points on California Resources 6% notes due 2024. The rest of the decliners were each down two points or less. The negative reading incorporates several heavy sessions since last Wednesday, including Monday’s massive global market sell-off sparked by steep losses in the Shanghai Composite.

Today’s average of 96.78 marks the lowest reading of 2015. The average is down 69 bps from the Aug. 13 reading nearly two weeks ago. Dating back nearly four weeks to the July 30 reading, the average is down 277 bps. However, due to a revision in the sample, the bond bids are still up 109 bps in the year to date.

With today’s decline in the average bid price, the average yield to worst widens 23 bps, to 7.65%, and the average option-adjusted spread to worst climbed 28 bps, to T+617. Both yield and spread are at 2015 wides.

The yield and spread in today’s reading are wider than in the broad index. The S&P Dow Jones U.S. Issued High Yield Corporate Bond Index closed yesterday, Aug. 25, with a 7.29% yield-to-worst and an option-adjusted spread to worst of T+587.

For further reference, take note that a June 24, 2014 reading of 106.98 – close to the February 2014 market peak of 107.03 – had the flow-name bond average yield at 5.02%, an all-time low, but spreads weren’t quite there. Indeed, the average yield was 7.63% at the prior-cycle peak in 2007, and the average spread at the time was T+290.

Bonds vs. loans
The average bid of LCD’s flow-name loans fell 51 bps in today’s reading, to 98.15% of par, for a discounted loan yield of 4.26%. The gap between the bond yield and discounted loan yield to maturity is 339 bps. – Staff reports

The data

  • Bids rise: The average bid of the 15 flow names declined 94 bps, to 96.78.
  • Yields fall: The average yield to worst slipped 23 bps, to 7.65%.
  • Spreads tighten: The average spread to U.S. Treasuries widened 28 bps, to T+617.
  • Gainers: The sole gainer was Charter Communications 5.75% notes due 2024, which rose a quarter of a point.
  • Decliners: The 10 decliners were led by California Resources 6% notes due 2024, which slumped 4.5 points, to 69.
  • Unchanged: Four of the constituents were unchanged.
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Bankruptcy: Caesars in restructuring pact with first-lien leveraged loan holders

caesarsCaesars Entertainment Operating Co. (CEOC) and its parent Caesars Entertainment Corp. (CEC) reached an agreement with CEOC’s first-lien leveraged loan lenders on the terms of a restructuring the company announced late Friday.

So far, holders of more than 50.1% of the first-lien bank claims have signed onto the agreement, according to an 8-K filed by the company this morning with the Securities and Exchange Commission.

The company said in its announcement that it continues “to engage in discussions with junior creditors to build additional support for the previously announced second-lien restructuring agreement in an effort to complete the restructuring consensually,” adding that the agreement with bank lenders “paves the way toward a confirmable plan for the restructuring of CEOC.” (See “Caesars nets revamp pact with ‘significant amount’ of CEOC 2L debt,” LCD, July 21, 2015, for a description of the second-lien restructuring agreement.)

In any event, Friday’s announcement comes a week after the company said in an earlier SEC filing that it had been unable to reach an agreement with the steering committee of bank lenders in the case (see “Caesars says it remains unable to reach deal with bank lenders,” LCD, Aug. 17, 2015, for a discussion of the issues that split the two sides).

The company said the agreement with bank lenders would, for the most part, track the current restructuring agreement in place between the company and its first-lien noteholders, albeit with certain adjustment to bank lender recoveries.

To review, under the current restructuring proposal CEOC would be split into an operating company and a REIT, which would hold ownership of CEOC’s properties. The new structure would be newly capitalized, in part, with roughly $1.6 billion of backing from CEC.

Among other things, the restructuring calls for bank lenders to receive $705 million in cash, $882 million in new first-lien debt to be issued by the contemplated operating company, $406 million of new second-lien debt to be issued by the contemplated operating company, $1.961 billion of new first-lien debt to be issued by the contemplated REIT, and up to $1.45 billion in additional cash or mezzanine debt to be issued by CPLV, a subsidiary of the REIT specifically created to hold the company’s properties located in Las Vegas.

According to today’s SEC filing, the company has now agreed to syndicate the new first- and second-lien debt to be issued by the contemplated operating company and pay an amount of cash equal to that new debt, $1.288 billion, to first-lien bank lenders.

In addition, in lieu of receiving CPLV Mezzanine Debt (as defined below), first-lien bank lenders will receive new second-lien debt in the maximum amount of $333 million to be issued by the contemplated REIT with a six-year term and interest at 8%.

Finally, on the date on which holders of 66.66% of bank claims have signed onto the agreement, or Sept. 8, whichever occurs first, CEC will make an upfront, pro rata payment of $62.5 million to bank lenders who sign onto the pact. Bank lenders agreeing to the restructuring will also be entitled to certain forbearance fees. – Alan Zimmerman

 

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Loan-fund AUM edges up in July, but outflows heavy so far in August

After declining by $2.8 billion in June, loan mutual funds’ asset under management edged up $343 million in July, to $136 billion, according to Lipper FMI and fund filings, as concerns over the potential Grexit faded after Greece agreed to a bailout package from the European Union. July’s small increase left loan fund AUM down $5.3 billion over the first seven months of 2015, from 2014’s final reading of $141.3 billion (though outflows resumed and intensified in early August amid choppy conditions across the capital markets, as we discuss below).

Loan fund AUG in July

 

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Oil & Gas companies account for more than a quarter of 2015 defaults

The global corporate default tally climbed to 70 issuers after two U.S.-based exploration-and-productions companies triggered a default in the past week. Oil & Gas companies now account for more than a quarter of defaults so far this year, according to a report published by Standard & Poor’s on Friday.

SandRidge Energy entered into an agreement to repurchase a portion of its senior unsecured notes at a significant discount to par, prompting S&P to lower its corporate credit rating on Aug. 14 to D, from CCC+, on what the agency considers to be a distressed transaction and “tantamount to a default”.

Samson Resources failed to make the interest payments due on its $2.25 billion of 9.75% unsecured 2020 notes due Aug. 15. Standard & Poor’s subsequently lowered Samson’s corporate credit rating to D, from CCC-.

Of the 70 defaulting entities, 40 are based in the U.S., 14 in emerging markets, 12 in Europe, and 4 in the other developed nations. By default type, 22 defaulted due to missed interest or principal payments, 19 because of distressed exchanges, 14 reflected bankruptcy filings, seven were due to regulatory intervention, six were confidential defaults, one resulted from a judicial reorganization, and one came after the completion of a de facto debt-for-equity swap.

Standard & Poor’s Global Fixed Income Research estimates that the U.S. corporate trailing-12-month speculative-grade default rate will rise to 2.8% by March 2016, from 1.8% in March 2015 and 1.6% in March 2014. – Staff reports