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Asset Growth at US Leveraged Loan Funds Stalls Amid Market Jitters

US leveraged loan fund AUM

The 2018 surge in asset growth at U.S. loan funds ground to a halt in October, with AUM increasing by a thin $360 million, down from $2.86 billion in September and from the roughly $3 billion average during the first nine months of the year, according to LCD and Lipper.

The October activity leaves loan fund AUM at $184.1 billion.

That’s the tenth straight month in which a record was set for the asset class, but is an obvious downshift in the face of a now-volatile equities market and relative blizzard of mainstream financial press headlines—accompanied by stories with varying levels of sophistication—urging caution where leveraged loans are concerned. – Staff reports

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Citi Prices $1B Middle Market Antares CLO 2018-3; AAAs at 145 bps

Citi today priced a $1.01 billion middle market CLO for Antares Capital Advisors LLC, according to market sources.

Pricing:

The transaction will close on Dec. 20 with the non-call period running until January 2021 and the reinvestment period ending in January 2023. The legal final maturity is in January 2031.

Year-to-date new issuance in the U.S. is now $120.03 billion from 223 CLOs, according to LCD data. This is the nineteenth new issue in November for a total of $10 billion. — Andrew Park

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With David’s Bridal Filing, US Leveraged Loan Default Rate Rises stands at 1.61%

The default rate of the S&P/LSTA Leveraged Loan Index now stands at 1.61% by principal amount after David’s Bridal filed for Chapter 11 in bankruptcy court in Delaware.

With Pacific DrillingExGen Texas PowerCumulus Media, and Walter Investment Management all rolling off the 12-month calculation in November, the rate dipped to 1.44% at the beginning of this month, having closed out October at 1.92%.

david's bridalBy issuer count, the rate is now 1.56%, down from 1.79% at the end of October.

It its Disclosure Statement filed this morning, the company cited “challenging bridal retail market conditions,” including increasing competition at the lower price points from online retailers, and its substantial debt burden as reasons behind its decision to seek relief in bankruptcy court.

The filing, which was expected, came after the company announced that a restructuring support agreement had been reached with 85% of its term loan lenders and 97% of its senior noteholders, as well as its principal equity holders, on a deal to reduce the company’s debt by more than $400 million and hand ownership to senior lenders.

Pre-petition term loan lenders, which are expected to recover approximately 70.8%, would get 76.25% of the reorganized equity, while those who participate in the $60 million new-money DIP financing would get an additional 15% of the new equity, court filings show. Holders of its unsecured notes, which have an estimated recovery of 4.4%, would receive around 8.75% of the reorganized equity, in addition to warrants.

The issuer’s originally $520 million covenant-lite TLB was placed in October 2012 to back Clayton, Dubilier & Rice’s acquisition of the retailer from Leonard Green & Partners, which retained a minority stake in the business.

The company said it has sufficient liquidity to meet its business obligations, noting that it has obtained commitments for $60 million in new DIP financing from its current term loan lenders and a recommitment of its existing $125 million ABL revolving credit facility.

A confirmation hearing is set for Jan. 7 ahead of expected emergence from bankruptcy in early January. — Rachelle Kakouris

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Riskier Borrowers Gobble Up Increasing Share of European Leveraged Loan Mart

b rated europe loans

The European leveraged loan market has grown rapidly over the last year, aided by a surge in issuance from riskier, single-B credits, as the pricing differential between this debt and other, higher-rated loan issues hit post-crisis lows. Investors attribute this spread compression to fierce investor competition for floating-rate assets.

But the growth in lower-rated names may be setting the scene for a rise in triple-C credits – the lowest rung on the ratings ladder for active debt issuers – further down the line, sources say.

The single-B portion of outstandings, per the S&P European Leveraged Loan Index (ELLI), has grown by 37% since the pre-crisis halcyon days of 2007, and by 42% just in the last 12 months. In absolute terms, this growth far outstrips that of double-B issuance. Indeed, the measure for trailing 12-month net growth in outstandings in the ELLI has averaged €2.5 billion in double-Bs since the start of 2017, and €25 billion for single-Bs.

Over the last year, the single-B growth is €38.6 billion.

This slant toward lower-rated debt matches movement seen in the investment grade market, where BBB level debt increasingly is taking a larger share of the market. This migration in credit quality alarms more than a few market watchers, as the current credit cycle – which has featured ever-looser loan structures – creaks along in its tenth year.

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Video: November European Leveraged Loan Market Analysis

In November’s Capital Markets View video, LCD’s Luke Millar and S&P Global’s Chris Porter cover the main trends in the European leveraged loan market. Discussed this month:

  • October’s loan issuance and the pipeline going forward.
  • How the market has turned again in favour of issuers, with lower pricing and strong demand from CLO investors.
  • Predictions on CLO volume for full-year 2018.
  • A look ahead at the markets into the first quarter of 2019.
  • Comparison of the growth of loans, bonds, and the FTSE 100, given a €1,000 investment.

The URL for the video: https://www.spratings.com/en_US/video/-/render/video-detail/capital-markets-view-november-2018

Luke Millar, sitting in this month for LCD’s Taron Wade, leads LCD’s European News efforts. Chris Porter is Head of Loan Recovery & CLO Business Development, S&P Global.

Please feel free to contact Chris if you’d like a particular topic discussed in next month’s video.

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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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US Leveraged Loan Market Hits Breaks as High-Profile Headlines Continue

loan index

Amid mixed corporate earnings and more flashing-siren headlines about the market, U.S. leveraged loans lost 0.12% today after slipping 0.04% yesterday, according to the S&P/LSTA Leveraged Loan Index. A 12 bps daily drop for the usually less-volatile loan asset class is relatively steep.

Loan returns are –0.09%  month to date and a comparatively strong 3.91% YTD.

Source: Instinct Loans Market Monitor/BAML

To be sure, it was a buyer’s market today, with sell interest in the secondary swamping bids for leveraged loan paper, according to the Bank of America Merrill Lynch Instinct Loans Market Monitor, a trading platform.

The big news recently, of course, was Sen. Elizabeth Warren on Wednesday calling out the leveraged loan market in a letter to federal regulators, citing as areas of concern covenant-lite loans and the booming collateralized loan obligation (CLO) market. Warren became the latest in a series of high-profile criticisms of the asset class over the past month or so. As did others, Warren pointed to events in 2008, leading up to the financial crisis, as one reason for concern about today’s long-running bull credit market. These headlines have contributed to a slowdown in investments in the market, managers say.

How concerning the recent market direction is can be up to some debate. The Loan Syndications & Trading Association, a trade organization for the asset class, responded yesterday to recent concerns regarding leveraged loans, pointing out, among things, that

  • Today’s market, despite its $1 trillion-plus record size, has grown at a relatively modest pace since 2007-08
  • Overall speculative-grade corporate leverage is lower now than before the financial crisis
  • Pre-crisis CLOs performed extraordinarily well after the financial crisis (these vehicles often are conflated with their second cousin, the CDO, whose role in the crisis offers far less opportunity for debate)

You can read Sen. Warren’s letter to regulators here, and the LSTA’s commentary on recent concerns about the market here.

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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.