Thomson Reuters LPC
Leveraged Loan Monthly – March 2017
Contents:
- Leveraged Loan Market Overview
- Investor Overview
- CLO Market Analysis
- List of recent CLOs
- Loan Fund Flows & Returns
Key Points:
Primary Market:
- Leveraged loan issuance surged to $345 billion in 1Q17 but was driven primarily by refinancing activity – which represented 76% of volume – as borrowers took advantage of market technicals to cut spreads.
- Institutional loan issuance climbed to a record $250 billion in 1Q17. As in the broader leveraged loan market, institutional issuance was primarily driven by refinancing activity, which accounted for 80% of deal flow.
- M&A leveraged loan volume amounted to $51 billion in 1Q17, down from $61 billion in 4Q16 and the lowest quarterly figure since 1Q13. LBO and non-LBO activity amounted to $23 billion and $28 billion, respectively.
- The top three sectors in terms of loan issuance this year are technology, financial services and telecom.
- European leveraged loan issuance was $48 billion in 1Q17, with refinancings representing over two-thirds of deal flow and new money volume at $16 billion. This 1Q17 new money volume is down from $22 billion in the prior quarter and $23 billion in first quarter last year.
- Middle market lending volume was $30.4 billion in 1Q17, down from $39 billion the prior quarter. Issuance amounted $23 billion in the large middle market segment and $7.4 billion in the traditional MM space.
- Loan spreads continued to tighten in 1Q17 as borrowers took advantage of strong market technicals to push pricing lower. Contractual spreads in the large corporate market averaged 344 bps in 1Q17, down from 363 bps in the prior quarter. Middle market spreads averaged 511 bps.
- On an overall yield basis, new issue loans continued their tightening pattern in 1Q17 as large corporate credits declined to an average of 4.46% and middle market yields fell to 6.10%. The decline was most prominent in BB rated credits which tightened to 3.7% from 4.1%. B rated loan yields fell to 5% from 5.3%.
- Average debt to EBITDA levels were marginally lower in 1Q17 than in the prior quarter, declining to 6.02 times for broadly syndicated LBO transactions and 5.61 times for institutional middle market LBOs.
- Five companies defaulted in March, with $4.1 billion of institutional loan debt. The largest were Ocean Rig UDW Inc. ($3.1 billion), Answers Corp. ($500 million) and EXCO Resources Inc. ($382.8 million). This brought institutional loan default volume to $7.7 billion in 1Q17, of which $3.8 billion is from energy companies. The trailing twelve month loan default rate is now at 2%.
Secondary Market:
- Both open-end loan fund and S&P/LSTA index returns were marginally positive in March, at 0.02% and 0.08%, respectively. YTD , 0pen-end loan funds have returned 0.97% on average and the index is up 1.15%.
- While secondary market prices have climbed sharply in the past year, bids edged lower in March with multi-quote institutional term loans finishing the month at 97.71.
- Looking at the distribution of secondary market prices, the share of par-plus loans slipped from their recent highs to 62% at month-end (and 68% on a dollar weighted basis). At this point a year ago, the par-plus share stood at only 7%.
- While the overall market has moved higher this year, the retail sector is an exception, with the average bid declining by 160 bps in the face of various issues affecting different companies including technological change and changing consumer behavior.
- European flow names pulled back from their recent lofty highs, declining by 76 bps in March to 100.29. A year ago, the Lev40 was at 98.87.
CLOs / Loan Funds:
- S. CLO new issue volume was robust again in March, amounting to $8.3 billion from 15 deals, up marginally from $8.1 billion (15 deals) in February, taking 1Q16 issuance to $17.4 billion.
- Refinancing activity dominated again in March. U.S. refinancings totaled $20.5 billion from 50 deals and resets amounted to $2.8 billion from five deals. This took YTD refinancing and reset volume to $49.5 billion. Most CLO refinancings this year have been driven by deals under the Crescent No Action Relief letter, whereby CLOs issued prior to December 24, 2014 and that meet specific conditions can refinance once without the need to meet the new risk retention requirement.
- New issue U.S. CLO AAA discount margins tightened further in March to an average of 127 bps. The tightest AAA discount margins was at 122 bps.
- Four new issue CLOs totaling €1.6 billion priced in the European market during March, taking YTD volume to €2.8 billion from seven deals.
- Assets under management is at $446 billion for U.S. CLOs, while European CLOs are at €67 billion.
- Retail loan funds posted their ninth straight month of inflows, adding $3.3 billion (through March 29 and based on funds that have reported so far), taking YTD inflows to $12.3 billion. Since the middle of last year, loan funds have added a lofty $27.5 billion.
- Loan mutual fund & ETF assets under management (market value) continued on their upward trend in March, reaching $150 billion.
- The retail loan fund share of institutional loan outstandings has increased to 16%, while CLOs are currently at 48%.
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