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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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Up From 2012, M&A Leveraged Loan Volume Still Lags Pre-Lehman Era

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U.S. leveraged loan issuance might have set a record this year, but one lending segment on which loan arrangers and institutional investors rely for high-fee, high-spread credits – the historically profitable M&A sector – is lagging the gaudy numbers set before the financial crisis of 2008-09.

Indeed, while acquisition-related loan volume in the year to date stands at $174.7 billion, up 40% from the same period in 2012, it is far inside 2007’s all-time high of $331.3 billion. The bulk of this year’s deals, of course, have been slim-margin refinancings. Some 47% of activity in 2013 has been refinancings, as issuers continue to take advantage of a cash-rich leveraged loan investor market that has seen an amazing run of net cash inflows.

The key missing element in the 2013 M&A picture, clearly, is a steady stream of large LBO deals. So far this year private equity firms have brought just two deals that required loans of $5 billion or more – Heinz and Dell Dell – versus 10 such loans in 2007, when jumbo public-to-private deals were legion.

As a result, LBO transaction volume in the year to date stands at $159.5 billion. That’s up 98% from the same period in 2012 but not even half of 2007’s record $434 billion. Not coincidentally, LBO loan volume so far in 2013 is also up big year-over-year – by 84% overall, to $79.2 billion, and by 88% in the institutional arena, to $65.7 billion – but it remains far short of 2007’s high of $189 billion/$157.0 billion.

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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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Amid Record Cash Inflows, Leveraged Loan Volume Keeps On

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U.S. leveraged loan volume for the week ended July 25 totaled $10.3 billion, in line with the past two weeks, after a new-issue lull brought about by the July 4 holiday and capital markets turmoil related to the Fed announcement on tapering. Year to date loan volume totals $384 billion, well ahead of the $224 billion logged at this point in 2012, according to S&P Capital IQ/LCD.

The new-issue market is maintaining momentum, especially for credits that hit the investor sweet spot (and perhaps benefit from a strong private equity sponsor). For instance: The massive success over the past week of a UBS UBS-led arranger group’s LBO deal for Gardner Denver was an elegant illustration that the financing window is wide open right now – for the right deal,” says LCD’s Chris Donnelly. Indeed, Kohlberg Kravis Roberts, which is acquiring the machinery concern in a $3.9 billion deal, was able to twice cut the proposed interest rate on the leveraged loan backing the transaction because of investor demand (they also added $100 million to the credit, bringing it to $1.9 billion).

One reason for the generally accommodating new-issue environment: Institutional investors continue to pour money into market. For the second time in two weeks U.S. loan mutual funds saw a record amount of investor cash, some $1.85 billion this week, which was preceded by $1.71 billion the prior week. Year to date, U.S. loan mutual funds have seen net inflows of $39.5 billion, according to Lipper FMI.

Deals like Gardner Denver and massive cash inflows are not making every credit brought to market a slam dunk, however. A number of issues saw investor-friendly revisions, reports Donnelly, indicating that, while institutional investors are hungry for paper, deals do have to check some of the boxes to be completed.

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