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US Leveraged Loan Funds See $731M Retail Cash Inflow

U.S. loan funds recorded an inflow of $731 million for the week ended May 16, according to Lipper weekly reporters only. This marks the largest inflow since $863 million for the week ended March 15, 2017.

It’s the thirteenth consecutive week of inflows for U.S. loan funds, for a total inflow of roughly $5.65 billion over that span.

Mutual funds drove the bulk of the weekly gain for a fourth consecutive week, with an inflow of about $518 million, while ETFs took in roughly $214 million.

The year-to-date total inflow is now $6.3 billion.

The four-week trailing average rose to $519 million, from $478 million last week, marking the 17th consecutive week in the black.

Total assets swelled to roughly $102.3 billion at the end of the observation period, which is the highest level since the week ended Sept. 24, 2014, when total assets were reported at $102.4 billion.

The change due to market conditions this past week was a decrease of $4 million. ETFs represent about 13.3% of total assets, at about $13.6 billion. — James Passeri

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Leveraged Loans: Covenant-Lite Share of Market Hits Record 77%

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April saw another record for covenant-lite issuance in the U.S. leveraged loan market.

By month-end, a full 77% of first-lien institutional loans outstanding were cov-lite, up slightly from the previous month, according to LCD.

The cov-lite market share has grown steadily, from roughly 60% in 2015, as retail investors and CLOs flooded the market with cash, looking to take advantage of the floating rate asset class amid rate hikes by the Fed.

Cov-lite loans have been in the spotlight over the past few years as their share of the market has grown. Detractors say these deals – which are structured akin to high yield bonds, offering less protection to lenders – could significantly impact recoveries when the current, long-running, issuer-friendly credit cycle turns.

In 2007, before the financial crises and at the end of the last credit cycle, cov-lite loans accounted for roughly 20% of U.S. leveraged loans outstanding. – Staff reports

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S&P Global: Europe’s Leveraged Finance Market Could Ride High Into 2019

Europe’s leveraged finance market is likely to stay buoyant for at least the rest of 2018, and probably the best part of 2019, says S&P Global Ratings in a report titled “How Long Can Europe’s Leveraged Finance Market Bonanza Last?

“As long as Europe’s growth cycle remains on track and is supported by quantitative easing and exceptionally low rates, we believe the operating environment is likely to be supportive,” said S&P Global Ratings in the report. “This is despite a number of potential problems that could trigger a turn in the market, most of which are external.”

The agency goes on to say that after €94 billion in high-yield bond issuance and €120 billion of leveraged loan issuance in 2017, market volumes are holding up in 2018, with €30.1 billion in bonds and €41.2 billion in loans issued in the first four months of the year.

The report states that causes for optimism include the improved credit performance of European corporates in recent months — with rating downgrades versus upgrades for high-yield issuers moving close to being balanced — and that this is backed by a macro environment that is supportive of operating performance, cheap funding conditions that are boosting the interest-coverage ratio, and a relatively prudent financial policy. Leverage has increased, but Europe sees less shareholder-friendly activity than in the U.S., where dividend payments and share buybacks tend to be a more prominent feature, S&P Global Ratings adds.

Another positive is the debt maturity profile, which gives companies some breathing space. Many issuers opportunistically refinanced their debt leveraging in the past year’s very favourable conditions, and debt maturities don’t pick up until 2021, thereby mitigating short-term risks, the agency adds.

“All this indicates to us that the tide is not yet ready to turn in Europe in 2018, and perhaps not even in 2019,” says the report. “As a result, we expect the corporate default rate in EMEA to remain very low at 2.5% by the end of 2018.” — Luke Millar

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Free Research – 17th Annual European Leveraged Finance & High Yield Conference

S&P Global was pleased to present recently its 2018 European Leveraged Finance & High Yield Conference: How Close Are We To the Top Of The Cycle?

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The conference featured a presentation by LCD’s Taron Wade regarding the intense institutional investor demand that is shaping the speculative-grade debt markets. The charts backing that presentation detailed trends and developments driving today’s market, including

  • European M&A activity, by specific use of proceeds
  • Trends in buyouts
  • Direct lending’s effect on the leveraged finance market
  • Yields on leveraged loans, Europe vs U.S.
  • The accelerating European CLO market
  • New issuance vs investor demand, European leveraged loan market
  • The increasing reliance on cross-border loan financing
  • The equity component of LBO financings (above)
  • … and, of course, the surge of covenant-lite loan issuance

The presentation also includes a panel discussion on risk of disruption in the credit cycle, a conversation regarding green investing, and a separate panel discussion on structural features and/or risks in today’s finance market.

You can download the slides backing Taron’s presentation here.

You can view the conference here. 

Both are complimentary, courtesy S&P Global Market Intelligence and LCD.

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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.

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Leveraged Loans: Covenant-Lite Issuance From Riskiest Borrowers Surges in Europe

b minus european loan issuance

Leveraged loan issuance from lower-rated borrowers has been driving activity in Europe lately (link), with covenant-lite deals leading the way.

As of April 20, in fact, there was €8.16 billion of cov-lite loans from issuers rated B- outstanding, according to LCD’s European Leveraged Loan Index (ELLI). That’s up from €6.58 billion at the end of March and from €3.51 billion one year ago.

Cov-lite loans have been in the spotlight of late as their use has skyrocketed, first in the U.S., then in Europe. These credits are structured akin to a high yield bond in that they feature incurrence covenants, as opposed to the more restrictive maintenance covenants.

With an incurrence covenant a debt issuer would have to meet a specific financial test only if it wanted to undertake a particular action (like borrow money to fund a dividend to a private equity sponsor, for instance). Under a maintenance covenant the issuer would need to meet regular, specific financial tests, even if it did not want to undertake that dividend deal.

Cov-lite detractors say these transactions could put investors and lenders in a precarious position, as they might not become aware if a borrower is nearing financial distress until a point where traditional remedies are no longer viable. – Staff reports

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US Leveraged Loan Fund Inflow Streak Hits 11 Weeks, $4.3B

US loan funds

U.S. loan funds recorded an inflow of $494 million for the week ended May 2, according to Lipper weekly reporters only. This follows last week’s inflow of $264 million and marks the eleventh consecutive week of inflows for U.S. loan funds, for a total inflow of roughly $4.3 billion over that span.

Mutual funds again led the gains this week, with an inflow of $373.5 million, while ETFs reported an inflow of about $121 million.

The four-week trailing average rose modestly, to $441 million, from $389 million last week, marking a fifteenth consecutive week in the black.

The year-to-date total inflow is now roughly $5 billion.

Total assets rose to roughly $101 billion at the end of the observation period, which is the highest level since the week ended Sept. 24, 2014, when total assets were reported at $102.4 billion. The change due to market conditions this past week was an increase of $205 million. ETFs represent about 13% of total assets, at about $13.3 billion. — James Passeri

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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.