December 10, 2018

Leveraged Loan Monthly – US: November 2018

by Hugo Pereira and Elizabeth Han.

The November 2018 edition of LPC’s Leveraged Loan Monthly is now available for download on LoanConnector & LC Reports.

Contents:

  • Leveraged Loan Market Overview
  • US High Yield Bond Market Overview
  • Investor Overview and Fund Flows
  • CLO Market Analysis
  • CLO League Tables
  • List of Recent CLOs

Primary Market

  • The primary loan market felt the effects of broader market volatility in November with at least five transactions being pulled this month. Leveraged loan issuance volume was $65bn, a 48% decline from October. YTD leveraged volume stands at over $1.12trn, down 13% YoY, with 62% of activity institutional, in line with last year’s portion.
  • Amidst broad market volatility, investors pushed for higher spread to commit to new leveraged loan deals in November. The average spread for large corporate borrowers inched up 7bp month-over-month to 351bp, while middle-market borrower spreads also increased 28bp to 490bp. According to Lipper, loan funds flow were negative in the last two weeks of November, and the inflow in November’s second week was only $49.5m.
  • Frothy market conditions and a looser stance from regulators pushed total leverage levels on LBO deals to new heights. 73% of 2018 LBOs have been levered 6x or higher while 41% are 7x or higher, both all-time highs.
  • There were 17 upward price flexes in November, including on spread and OID as investors demanded more to commit to certain deals. This is the highest level of price bumps since June. In contrast, price cuts fell from 23 in October to only nine in November; the lowest monthly level in 2 years.
  • The Chapter 11 filing of David’s Bridal and the missed payment by FULLBEAUTY Brands, both companies in the retail sector, made up the bulk of loan default volume in November. 2018 YTD defaulted par volume is $20.25 billion and the trailing-twelve-month default rate in November ticked lower to 1.8%.

Secondary

  • Leveraged loans posted a negative return of 0.9% in November, the second consecutive monthly negative return and the worst monthly performance in two years, according to the S&P/LSTA LLI. YTD loan returns now stand at 3.06% behind the 3.71% recorded at this time last year.
  • Average returns for open-ended loan funds were also negative in November to 0.83%, and now stand at 2.26% YTD.
  • Institutional loan outstandings ended November at $1.126trn, representing an increase of 18% into 2018. By comparison, outstandings grew 8% in 2017.
  • Secondary bids experienced the biggest monthly slide since the first quarter of 2016, as concerns around credit and signs of slowing global economic growth drove the average bid for multi-quote institutional loans down 135bp in November to the 96.9 context. Average bids are down 149bp so far into the fourth quarter and stand 146bp lower since the start of the year. The percentage of loan bids marked at or above par declined to 11%, from 45% the prior month while the share of loans priced between 98 and less than par increased to 64% from 40% in October.
  • Led by huge outflows from open-ended funds and a lower secondary, loan mutual fund & ETF assets under management (market value) declined to $167.8bn in November. AUM has declined by $7.7bn since September but remains up 8% this year.
  • Yield on US high-yield bonds widened 27bp to finish November in the 7.2% context, which is their highest levels all year and represents the widest since 2016. The average price tumbled 118bp this month to the 95 context.

CLO and Loan Funds

  • Despite broader market volatility, new-issue CLO activity accelerated in November registering over $13bn in volume spread over 25 deals, including 5 middle-market CLOs amounting to $3.2bn in volume. Year through November issuance stands at $122.4bn, which is 14% ahead of last year’s clip and just shy of 2014’s record volume. New issue volume in the European CLO market spiked in November with 10 issues pricing for €4bn in volume. 2018 YTD volume now stands at €27bn, which is a post-crisis record.
  • There was $11.7bn of CLO repricing activity in November, with $8.8bn in resets, $1.1bn in reissues and just under $2bn in refinancings. YTD there has been $148bn in refi activity with resets/reissues making up the bulk share of 77% or $114bn.
  • Average AAA DMs ticked higher to 120bp in November, reflecting the elevated supply of CLO paper coming to market.
  • US CLO AUM stands at $582bn, $88bn higher since the start of the year, representing the largest growth in AUM post-crisis.
  • Although CLO issuance remained strong in November, the average WAB for CLO portfolios declined sharply as less than 1% of US CLOs have a WAB at or above par, and 82% have a WAB between 97 and 99, compared to 61% a month ago. In European CLO portfolios, only 9.2% of CLOs had a WAB between 99 and par, compared to 56% the prior month.
  • Outflows from loan funds accelerated with a $2.23bn outflow for the week-ending December 5. This marked the largest weekly loan outflow on record. For November, loan funds posted outflows of $4bn, the largest monthly outflow in three years. YTD inflows now stand at $11.7bn. HY bond funds posted an outflow of $2.4bn in November taking the YTD figure to $34.5bn in outflows, which already stands as the largest level of annual outflows from HY bonds Lipper has recorded.
  • Breaking loan funds out by their ETF and mutual fund categories, ETFs have registered outflows in the last two months and now stand at negative $325m YTD. Mutual funds registered outflows of $3.5bn in November and stand at $12bn YTD.

View this document on LC Reports


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