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Leveraged Loan Issuance Slumps To $1.6B Amid More Cash Outflows

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Leveraged loan issuance in the U.S. slid to $1.6 billion this week as investors continue to pull cash out of the asset class and the market sets its sights on 2015.

The paltry weekly volume is the smallest total since the dog days of August. With the recent activity, year-to-date leveraged loan issuance in the U.S. now stands at $524.4 billion, down from the $605.2 billion seen at this point last year (the full-year 2013 total was $606.7 billion).

While volume tailing off at year-end might not constitute big news in the loan market, the pace at which investors are retreating from the market is. Indeed, institutions withdrew another $1 billion from the asset class this week, making for a net $13.2 billion withdrawal so far this year, according to Lipper.

The siege on loan funds is so pronounced that the SEC has taken interest, as detailed in this New York Times story yesterday. (More testimony of how impressive the outflows are: The Times usually does not devote significant column inches the leveraged loan market). Perhaps raising most eyebrows in this story: “critics” of leveraged loan funds suggesting that any asset that does not complete settlement within seven days be defined as “illiquid”. Leveraged loan transactions take notoriously long to settle, of course, oftentimes weeks.

To the market proper, bifurcation remains the word, according to LCD’s Chris Donnelly:

Arrangers continued to rework to meet the yield expectations of investors on the most challenging transaction still left in market, but there was plenty of demand for better-rated and less leveraged transactions, allowing other issuers to extract pricing concessions despite the challenging market conditions. In short, it’s still a market of haves and have-nots, exacerbated by sector pressures, stepped-up retail outflows, and year-end fatigue.

As for new issues, there were two transactions out of the handful that emerged this week backing dividends to private equity sponsors. The first is a $300 million credit for Cengage Learning (Apax Partners). The other is a $205 million credit for Vogue International (Carlyle).

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Amid Market Shift, Summer Lull, Leveraged Loan Issuance Grinds To Halt

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The U.S. leveraged loan market saw no new deals this week as investors and issuers either engaged in price discovery for credits already brought to a changing market or began closing up shop for the summer. With this week’s goose egg, year-to-date volume holds at $391 billion, compared to $411 billion at this point in 2013.

While there were no new issues brought to the syndications market during the week, that’s not to say there was no activity. Amid continued withdrawals from U.S. loan funds and uncertainty in the neighboring high yield bond market, loan issuers and investors wrestled over credits brought to market earlier in the month.

Indeed, there were no fewer than 19 investor-friendly price flexes during the week, according to LCD’s Chris Donnelly. A leveraged loan price flex is when a deal’s interest rate or upfront fee is changed during the syndications process, depending on demand. For much of the recent past issuer-friendly price flexes – where interest rates are trimmed – have dominated, due to the huge overhang of investor cash in loan funds.

That has changed, however. U.S. loan funds have seen five straight weeks of cash outflows, totaling roughly $3.3 billion, and 13 weeks of withdrawals over the past 14 weeks, according to Lipper. Year to date, loan funds have seen $2.2 billion of net outflows.

The change in market sentiment is evident in yields, which on lower-rated, single-B loans increased to 5.27% this week from 5.1% a week ago, according to S&P Capital IQ/LCD.

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Leveraged Loan Issuance Plunges To $5B Amid Cash Outflows, Postponements

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U.S. leveraged loan issuance slid to $5.3 billion last week from more than $20 billion the week prior as institutional investors continued their retreat from all things leveraged finance, forcing a number of borrowers to rework deals or shelve them altogether.

With the week’s activity, year-to-date loan volume totals $392 billion, down from the $408 billion at this point in 2013 (there was a record $605 billion recorded during all of last year).

To be sure, the recent investor withdrawal from the leveraged finance segment – leveraged loans and, even more pronounced, high yield bonds – has thrown the market akilter, including high-profile credits that had been on the horizon.

“Let’s remember, big executions came to market on the idea that issuers could take advantage of hot market conditions, and a summer lull to print deals way in advance of closing,” wrote LCD’s Chris Donnelly late last week. “But it’s not working out like that.”

Indeed, in a high-profile example, Jupiter Resources shelved a $1.125 billion credit backing M&A. As well, SeaStar Solutions scrapped a credit planned to refinance some $208 million in debt while HCP HCP Global shelved a $380 million loan backing a dividend to shareholders. Also notable was Charter Communications, which revised a loan backing the company’s acquisition of Comcast assets.

Of the handful of deals launched during the week, a $2.3 billion credit backing Travelport Travelport, owned by private equity sponsor Blackstone, was the largest.

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U.S. Leveraged Loan Volume Slips To $9.2B, Though Market Remains Heated

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U.S. leveraged loan volume totaled $9.2 billion during the week, down from $14-15 billion in each of the previous two weeks, as issuers continue to take advantage of a relatively hot market, though with smaller deals, according to S&P Capital IQ/LCD.

With the recent activity, year-to-date loan volume totals $367 billion, compared to $384 billion at this point last year (of course, there was a record $605 billion in leveraged loan issuance in all of 2013). July is turning out to be a relatively sleepy month volume-wise, with $38 billion in issuance so far, down noticeably from the $64 billion during June.

Despite the dip in issuance, the loan market remains hot, as LCD’s Chris Donnelly explains in his weekly market commentary:

Judging by activity over the past week, recent chatter about an overheated loan market looked to be largely justified. Investor Investor demand was hot and heavy this week, with pricing tightening on no fewer than a dozen transactions alongside other aggressive moves. It was primarily the marginal transactions that saw any degree of difficulty.

Of note this week, Expro Oilfield Services brought to market a $1.52 billion term loan that backed repayment of mezzanine debt. The issuer, which is owned by Goldman Sachs PIA, Arle Capital Partners, Alpinvest Partners and management, has filed for an IPO. The credit is covenant-lite, meaning it has less restrictions on the issuer than does traditional leveraged loans.

Also of note this week, Berkshire Partners launched $415 million in loans to institutional investors, backing the LBO of Portillo Restaurant Group. The credit is covenant-lite as well, and includes a second-lien portion rated CCC by S&P, says LCD’s Kerry Kantin.

Befitting the hot market, leveraged loan yields continue under pressure. The average single-B credit priced over the past 30 days did so to yield 5.10%, down from 5.32% at the end of June, while better-quality (double-B) loans are yielding 4.16%, down a bit from 4.19% at month-end, according to LCD.

This activity comes as investors continue to back away from the leveraged loan asset class. U.S. loan funds this week saw a $413 million cash outflow, the 13th withdrawal in the past 15 weeks, totaling $6.6 billion, according to Lipper. That’s nothing compared to high yield bond investors, however, who are fleeing the market at a pace not seen since Ben Bernanke’s Taper Talk pummeled the market in June 2013.

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Despite Cooling Market, Leveraged Loan Volume Rebounds To $11.5B

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U.S. leveraged loan issuance jumped to $11.5 billion over the past week from $7.4 billion during the previous week (which was slowed by holidays). Despite the rebound in volume – largely to levels seen before the spring holidays – the loan market continues move away from the break-neck pace of refinancings seen for much of the recent past.

Indeed, of the 22 new issues launched last week, only seven backed refinancing, while the remainder supported dividends/recaps benefitting private equity shops, LBOs, mergers and capital expenditures.

“The recent weakness in the loan secondary market – and the lackluster performance of new issues – clearly has made a mark on the primary,” writes Chris Donnelly, who covers the loan market for LCD. “Though arrangers remain busy rolling out new loans, repricing activity has nearly evaporated, and investors are gaining more leverage to negotiate deal terms.”

That leverage is visible in any number of market metrics, including price flexes, where pricing or terms on a loan currently in syndication is changed, depending on market demand (or lack thereof). So far in February (through Thursday), 15% of loans brought to market have been flexed downward (favoring issuers) while 14% have been flexed upward (favoring investors). For most of the recent past issuer-friendly flexes have vastly outnumbered investor investor-friendly flexes.

Another sure-fire sign of the cooling market: Investors withdrew cash from U.S. loan funds for the second straight week, after a 95-week run of inflows, totaling nearly $67 billion.

As for deals, German bearings and automotive concern Schaeffler AG made the biggest splash with a $1.65 billion loan, one of the relatively few refinancings in market. Private equity firms were busy during the week as portfolios companies including Eddie Bauer (Golden Gate), Environmental Resources (Charterhouse), Grande Communications (ABRY), and HHI Group (American Securities) each approached the market seeking loans backing dividends.

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Leveraged Loan Issuance Surges To $15B As Market Remains Hot

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Leveraged loan issuance in the U.S. surged to $15 billion this week from $7.7 billion last week as the market continues upward, even as equities slump sharply. Year to date (through yesterday), leveraged loan issuance totals $48.8 billion, according to S&P Capital IQ.

Once again there was a handful of more richly priced LBO loans among the roughly 20 deals brought to market during the week. The largest was a $1.5 billion credit backing KKR’s acquisition of insurance concern Sedgwick Claims Management Services. That deal, like many of late, includes a second-lien tranche. The growing number of second-lien credits is another indicator – along with covenant-lite loans – of just how much investor demand there is.

Also this week, private equity concern Carlyle launched a $435 million loan backing its LBO of Vogue International, a hair-care and personal products manufacturer.

Again, the market remains hot. Reverse-flexes continue, and new opportunistic transactions – aka refinancings – have emerged despite the fact that the broader markets are supposedly down, writes LCD’s Chris Donnelly.

Indeed, leveraged loan yields continue to fall. The average single-B yield on a U.S. leveraged loan slipped to 4.61% this week from 4.85% a week ago. Double-B new-issue loan yields inched to 3.33% from 3.4%, according to Donnelly.

Why the sustained market pressure? Institutional investors continue to sit atop an ever-growing mountain of cash. This week saw a $460 million net inflow to U.S. loan funds, according to Lipper. That makes 85 straight weeks of cash flowing into market, totaling a whopping $63 billion. Year-to-date loan fund inflows total $3.4 billion, says Lipper.

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Leveraged Loan Volume Totals $7.2B As Market Heats To 'Absurd' Levels

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U.S. leveraged loan volume totaled $7.2 billion during the week via a relatively modest 20 new issues, as cash-rich institutional investors step up for seemingly every credit that comes into view, shifting the market into high gear.

Indeed, “market conditions for leveraged loans have pushed into the absurd,” writes LCD’s Chris Donnelly. “Buyers of various stripes have stepped forward to oversubscribe virtually every transaction with nary a thought given to credit-related concerns. “

There are a number of reasons for the rapidly heating market, which has made price flexes – where issuers reduce the interest rate offered on a loan while the credit is still in the syndications process – commonplace. Chief among them is the ever-growing mountain of cash on which institutional investors sit.

This week, in fact, U.S. loan funds saw another $804 million flow into investor coffers, according to Lipper. That makes 84 straight weeks of net inflows – the last outflow was June 2012 – totaling $62.3 billion.

As for deals, there were loans backing LBOs amid the usual surge of refinancings (LBO loans, of course, pay higher fees and interest rates to investors and arrangers, so these credits a highly prized). Private equity concern Madison Dearborn this week launched $1.3 billion in credits backing its buyout of Ikaria Holdings, a biotech concern. As well, Bain Capital launched $300 million in loans supporting its acquisition of Bob’s Discount Furniture.

Regarding those refinancings. There were 11 more this week, as leveraged loan issuers continue to take advantage of accommodating institutional investors to decrease borrowing costs. Most visible was a $1.9 billion loan for Dunkin’ Brands, owner of Dunkin’ Donuts. With the refinancing the company reduces its current interest rate by at least 25 bps.

Year to date the U.S. leveraged loan market has seen some $34.3 billion in issuance, according to S&P Capital IQ/LCD.

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Leveraged Loan Volume Drops To 2-Year Low In August

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Leveraged loan activity in the U.S. hit its lowest monthly level in two years during August, with $16.7 billion in new-money deals, according to S&P Capital IQ/LCD. Part of the reason for the unimpressive showing, clearly, is the unofficial market holiday during the past two weeks (in August of 2012 there was a likewise unimpressive $21 billion in volume).

Another reason: loan arrangers and institutional investors were keeping their powder dry in August in preparation for what is expected to be an active post-Labor Day loan market. Indeed, there are some $40 billion of institutional loans that have been announced or are expected in market during the coming weeks, much of it M&A related, according to LCD’s Chris Donnelly.

And there should be demand for those deals, as investors continue to pour money into loan mutual funds. U.S. loan funds last week saw their seventh straight inflow of at least $1 billion (the total was $1.18 billion, according to Lipper), and the 63rd consecutive week in which there has been a net inflow of investor cash into the market, says LCD’s Jon Hemingway. So far in 2013 there has been a net inflow of $39 billion into loan mutual funds and loan ETFs.

The August loan market activity brings year-to-date volume to $419 billion, well ahead of the $252 billion posted at this time in 2012 and nearing the $464 billion recorded during all of last year. The full-year record is $535 billion in 2007.

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