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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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After December Hiatus, European CLO Market off to Deliberate Start to 2019

Europe CLO issuance

The market for collateralized loan obligations in Europe has gotten off to slow start this year, with one deal totaling €510 million, according to LCD. The scarce activity comes after a December with no new CLO issuance, and amid wild gyrations in the usually less-volatile global leveraged loan market.

Before December there was some €27.3 billion of CLO issuance in 2018, a record.

CLOs are an essential component of the leveraged loan investor base. Leveraged loans, which are undertaken by riskier borrowers (those rated BB+ and lower), now total the equivalent of some $1.35 trillion in outstandings, according to LCD, rivaling the high yield bond market. In the U.S. roughly 60% of these credit are held by CLOs.

Activity in CLOs could well pick up.

The pipeline should start to deliver some more meaningful supply this month, and leveraged loans backing Ahlsell and Proxiserve already are on offer to early-bird investors, writes LCD’s David Cox.

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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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