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US Leveraged Loans Return 0.16% on Tuesday

U.S. leveraged loans gained 0.16% yesterday after gaining 0.12% on Monday, according to the S&P/LSTA Leveraged Loan Index.

The S&P/LSTA US Leveraged Loan 100, which tracks the 100 largest loans in the broader Index, gained 0.25% today.

Loan returns are 1.43% in the month to date and 4.02% in the YTD.

The recent tailwind the loan market is seen is evidenced in the strong secondary bid, per the BAML Instinct Loans Market Monitor.

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Sprint wraps $900M add-on leveraged loan

Sprint Communications completed a $900 million fungible add-on to its B-1 term loan due February 2024 (L+300, 0.75% LIBOR floor) in a transaction led by J.P. Morgan, according to sources. Terms were finalized tight to talk at an OID of 98, with a $500 million upsizing. Proceeds will be used for general corporate purposes. The issuer in November 2018 placed the original $1.1 billion TLB-1. Overland Park, Kan.–based Sprint Communications, a wholly owned subsidiary of Sprint Corp. (NYSE: S), is a provider of U.S. wireless telecommunications. Terms:

Borrower Sprint Communications
Issue $900 million fungible add-on B-1 term loan
UoP GCP
Spread L+300
LIBOR floor 0.75%
Price 98
Tenor February 2024
YTM 6.32%
Four-year yield 6.66%
Call protection 101 soft call
Corporate ratings B/B2/B+
Facility ratings BB-/Ba2/BB+
Recovery ratings 1
Financial covenants None
Arrangers JPM
Admin agent JPM
Px Talk L+300/0.75%/97–97.5
Sponsor Public
Notes Upsized by $500 million.

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Cov-Lite Leveraged Loan Outstandings Hit $922B

The dominance of the covenant-lite structure in the ever-growing U.S. leveraged loan market is continuing into 2019, though the market share these ostensibly riskier credits hold seems to have plateaued.

At the end of January, 78.8% of all outstanding U.S. leveraged loans were covenant-lite, according to LCD. That’s down slightly from the record 79.2% the previous month, to levels seen during most of 2018’s fourth quarter.

The current figure means there’s some $922 billion of cov-lite credits outstanding, as the U.S. leveraged loan market now totals $1.17 trillion, according to the S&P/LSTA Loan Index.

Cov-lite loans are less restrictive to debt issuers and the private equity shops that sponsor them, while offering lenders and institutional investors less protection than do traditionally covenanted deals. Broadly speaking, cov-lite credits have bond-like incurrence covenants, which come into play only if the borrower takes a specific action, such as issuing more debt or making certain acquisitions. Traditionally structured loans have maintenance covenants, where borrowers must pass regular, agreed-to tests of financial performance, such as minimum levels of cash flow and maximum levels of leverage.

You can read more about how loan covenants work in LCD’s Leveraged Loan Primer.

Cov-lite has become something of a lightning rod as loan market detractors – with an eye on what already is an inordinately long credit cycle – say these deals will see lower-than-usual recoveries in instances of default, due to the lack of ‘early’ warnings that full covenants might provide investors.

Indeed, while data points on this topic are necessarily thin – the U.S. leveraged loan default rate has been at or below historical norms for years – there is some research that shows investors in cov-lite loans will recover less, in cases of default.

S&P last summer looked at cov-lite loans emerging from bankruptcy in 2014-2017 (again, the sample is relatively thin). The ratings agency found that cov-lite loans, on average, recovered 72%, compared to an 82% average recovery on fully-covenanted loans.

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US Leveraged Loans Returning 0.64% in February, 3.21% YTD

U.S. leveraged loans are following up on their best January since 2009 with a solid February, with the asset classes returning 0.64%, according to the S&P/LSTA Loan Index. Of course, the recent performance follows a dismal December, when loans lost a heart-stopping 2.54% , its worst performance in seven years, amid serious volatility in the equities markets and general unease about the global economic picture.

The loan market has stabilized as retail investors have slowed their retreat from the asset class.

In December, loan mutual funds and ETFs saw roughly $12.2 billion of net withdrawals. That figure lessened to $4.4 billion in January, according to Lipper. While outflows are continuing this month, they’re easing even more. Withdrawals totaled a relatively slim $472 during the week ended Feb. 13, though that was the thirteenth straight outflow for the asset class, per Lipper.

Of note, loan ETFs saw a roughly $246 million inflow last week, the first such movement since early last month.

Another indication of the recent loan market rebound. There’s actual green (denoting a bid for secondary assets) per BAML/Instinct’s leveraged loan market trading platform – Tim Cross

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After record 2018, issuance of US CLOs off to quiet start to year

US CLO issuance

After record issuance in 2018, the market for U.S. collateralized loan obligation vehicles is off to a cautious start, after the broader financial market gyrations of December and January. Through Feb. 8 there has been $6.36 billion of CLO vehicles priced, compared to $11.32 billion during the same period one year, according to LCD.

CLOs are special-purpose vehicles set up to hold and manage pools of leveraged loans. They are a critical component of the U.S. leveraged loan investor base, accounting for some 60% of all loans broadly syndicated to institutions.

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Ditech, in restructuring agreement with loan lenders, files Ch. 11 but still seeks sale

Ditech Holding Corp. on Feb. 11 filed for Chapter 11 in bankruptcy court in Manhattan to implement a restructuring support agreement that the company has entered into with holders of more than 75% of the company’s term loan, the company announced.

According to a news release this morning, “the RSA provides for a restructuring of the company’s debt while the company continues to evaluate strategic alternatives.”

According to the first-day declaration filed in the case by Gerald Lombardo, the company’s CFO, the RSA contemplates that more than $800 million of funded debt would be extinguished, with the term lenders receiving 100% of the reorganized equity in exchange, and the existing term loan restated in the amount of $400 million.

The contemplated reorganization plan does not provide for any recovery for either the company’s second-lien lenders or current equity holders, although trade claim holders, deemed essential to the company’s ongoing operations, would receive a cash distribution “in an amount equaling a certain percentage of their claim, subject to an aggregate cap,” Lombardo said.

The RSA also contemplates “an appropriately sized working capital facility” upon emergence.

According to the Lombardo declaration, the RSA also provides for the possibility of “another liquidity enhancing transaction,” stating that as a “toggle” to such a transaction, the RSA “provides for the continuation of the company’s prepetition marketing process whereby any and all bids for the company or its assets will be evaluated as a precursor to confirmation of any Chapter 11 plan of reorganization.”

According to court filings, the company’s prepetition marketing process, which began in June 2018, generated at least one potential all-company bid that was subsequently withdrawn, and two bids for the sale of certain servicing and reverse assets with subservicing retained by the company. In December 2018, however, the company decided not to pursue a sale transaction, and turned its attention to negotiating a reorganization with term loan lenders.

Specifically, Lombardo explained, in connection with its reorganization plan, the company would seek proposals for three types of deals, namely a sale transaction for all or substantially all of the company’s assets, an asset sale transaction for a portion of the company’s assets, or a master servicing transaction consisting of an agreement with an approved subservicer to service all or substantially all of the company’s mortgage servicing rights.

“Accordingly, upon completion of the marketing process, not only will the reorganization transaction be fully market tested,” Lombardo said, “the debtors will also be in the best position to compare their options against the reorganization transaction before proceeding to confirmation of their Chapter 11 plan of reorganization.”

In terms of a timeline, the company said it would file a proposed reorganization plan and disclosure statement and proposed bidding procedures by Feb. 26, obtain orders approving the disclosure statement and bidding procedures by April 2, begin an auction (if needed) by May 17, begin a reorganization plan confirmation hearing by June 6, and emerge from Chapter 11 by June 16.

Finally, Lombardo said that to address the company’s immediate working capital needs that it has secured commitments for a $1.9 billion warehouse DIP facility to refinance the company’s existing warehouse and services advance facilities.

The commitments include up to $650 million to fund the company’s origination business, up to $1 billion available to the company’s reverse mortgage servicing business, and up to $250 million available to finance advance receivables related to the company’s servicing activities.

Weil, Gotshal & Manges is the company’s legal counsel, Houlihan Lokey its investment banking debt restructuring advisor, and AlixPartners its financial advisor.

Kirkland & Ellis is acting as legal counsel to the term lenders, with FTI Consulting acting as the group’s financial advisor.- Alan Zimmerman

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US Leveraged Loans Returning 2.86% YTD

Daily loan index 2019-02-07

After an epic plunge in December and a wild rebound in January, prices on U.S. leveraged loans in the trading market have climbed 31 bps during the first week of February.

Loans gained 0.04% yesterday after gaining 0.08% on Wednesday, according to the S&P/LSTA Leveraged Loan Index.

The S&P/LSTA US Leveraged Loan 100, which tracks the 100 largest loans in the broader Index, gained 0.06% today.

Loan returns are 2.86% in the YTD.

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US Leveraged Loan Default Rate Slides to 17-Month Low

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The default rate on U.S. leveraged loans slid to 1.42% in January, marking a 17-month low for the asset class, according to LCD.

The rate is down from 1.63% in December and has fallen steadily from the three-year high of 2.42% at the end of 2018’s first quarter. It remains well below the 2.96% historical average.

The dip in the default rate comes despite sustained concern from the broader financial markets that the aging credit cycle, which began after the financial crisis of 2007-08, is approaching an end (though there is no consensus as to when that will be exactly, of course). One thing that all agree on: The widespread acceptance of covenant-lite loan issuance over the past few years – some 80% of leveraged loan debt now outstanding are cov-lite – has enabled or could allow loan issuers that might face problems with mounting debt to skirt potential default issues, for a time, anyway.

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TransDigm makes quick return to US high yield bond market for $750M deal

TransDigm is back in the market with a $550 million offering of eight-year (non-call three) subordinated notes, and a $200 million add-on to the recently priced 6.25% secured notes due 2026, sources said. Pricing for the deal is expected today, Feb. 1.

Joint bookrunners for the secured debt are Morgan Stanley, Credit Suisse, Citi, Barclays, RBC Capital Markets, Credit Agricole, and KKR Capital Markets. Bookrunners for the senior subordinated paper are Morgan Stanley, Credit Suisse, KKR Capital Markets, Citi, Barclays, and RBC Capital Markets. Existing ratings are B+/Ba3 for the secured debt, and B–/B3 for the subordinated notes.

Proceeds of the new subordinated notes are earmarked to redeem the borrower’s $550 million outstanding of 5.5% notes due 2020, according to an offering memorandum. The funds raised from the tack-on secured bonds will support the company’s acquisition of Esterline Technologies.

TransDigm earlier this week placed the initial print of the 6.25% secured notes due 2026 supporting the Esterline buy, as a $3.8 billion transaction. Final terms were set at par. The offering was initially proposed to include $1 billion of senior subordinated notes, which were subsequently removed, with that amount steered to the secured tranche and an additional $100 million tacked on. These notes closed the session on Thursday, Jan. 31, at 101.75, yielding 5.85%, trade data show. Trades recorded this morning show the bonds changed hands at 101.25, for a 5.96% yield.

TransDigm is a designer, producer, and supplier of highly engineered aircraft components. – Jakema Lewis

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Free Webinar: Global High Yield Markets Opportunities, Pitfalls in 2019

webinar imageS&P Global Market Intelligence and LCD are excited to present on Tuesday, Jan. 29 a complimentary webinar on the  global high yield market: Opportunities and Pitfalls in 2019.

You can register for the event here.

Topics covered in this webinar include

  • An overview of 2018 U.S. high yield performance
  • Historical perspective on the late 2018/early 2019 downturn
  • Is the distress ratio signaling a recession? How reliable is this predictor?
  • Deal flow in the face of rising credit risk: 2019 outlook in the U.S. and European high yield markets
  • Risks and opportunities in today’s global high yield market
  • Ratings performance
  • Multi-notch downgrades
  • Fallen angel risk
  • Distressed and default outlook

Date
Jan. 29, 2019

Time
10-11 am EST

Speakers

Marty Fridson
CIO
Lehmann, Livian, Fridson Advisors LLC

Diane Vazza
Managing Director, Head of Global Fixed Income Research
S&P Global Ratings

  Nicholas Kraemer, FRM
  Senior Director, Global Fixed Income  Research
S&P Global Ratings

John Atkins
Director, Leveraged Commentary & Data
S&P Global Market Intelligence

Luke Millar
Director
S&P Global Market Intelligence

Ruth Yang
Managing Director, Leveraged Commentary & Data
S&P Global Market Intelligence

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LCD comps is 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.