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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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Cov-Lite Loans in Europe Hold at 82% of Market

Covenant-lite credits now account for 81.6% of all outstanding leveraged loans in Europe, nearly double the rate seen only three years ago, according to the European Leveraged Loan Index (ELLI).

As of Jan. 31 there was €181.75 billion of European loans outstanding, according to the ELLI, meaning there is some €148 billion of cov-lite debt now held by investors.

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.

In the much-larger U.S. market there is roughly $922 billion of cov-lite loans outstanding, according to the S&P/LSTA Loan Index.

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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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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.