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


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.


Leveraged Loan Volume Slides to $6.6B Though 2013 Total Tops $600B


After seeing almost $26 billion in issuance the week ended Dec. 6 the U.S. leveraged loan market is taking a breather, recording a tepid $6.6 billion in activity this week, though issuers continue to bring refinancings to market before year-end.

The recent activity brings year-to-date loan volume to a milestone, however. The $600.4 billion seen so far in 2013 builds on the record that was established last month. The previous full-year record was $535 billion in 2007.

This biggest splash this week was courtesy Chrysler Group, which brought to market a $2.93 billion leveraged loan refinancing that would take the auto maker’s borrowing cost from L+325 to L+275. Such cost-saving activity has been all over the market this year. Indeed, roughly half of all new issuance in 2013 has been via refinancings, according to LCD.

As usual, private equity concerns were keeping busy, though not with LBO loans. Carlyle this week brought to market a $500 million refinancing for truck concern Allison Transmission. As well as paying down more expensive debt, Carlyle unveiled a loan amendment that would strip covenants from Allison’s remaining term loans (making them covenant-lite).

Leveraged loan issuance has tapered off this week, and so has investor cash into the asset class. U.S. loan funds saw one of their smallest cash inflows of the year this week, $462 million. The small inflow is relative, of course. Those loan funds have seen 78 straight weeks of investor cash inflows without a redemption, totaling an impressive $58.5 billion.


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


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.


With M&A Scarce, 1Q LBO Loan Volume Totals Tepid $26B


LBO activity continues to disappoint in the leveraged finance markets, especially compared to hopes of a willing institutional investor base with lots of cash to put to work.

Loan activity backing leveraged buyouts during the first quarter totaled $26 billion, and much of that comes from one deal: Berkshire Hathaway‘s $28 billion acquisition of Heinz, which spawned some $11 billion in bank debt.

The quarterly LBO loan total, of course, is nothing compared to the $185 billion of overall leveraged loan volume seen during the period. The bulk of that activity, however, is refinancings, as issuers rushed to market to take advantage of historically low borrowing costs.

Looking forward, accounts report a disheartening lack of front-end LBO activity, suggesting that the second quarter of the year might be no busier than the first for M&A.


Foreign Cash Could Bolster Dell LBO Financing


Deal Journal colleague Vipal Monga Files this dispatch on the possible Dell LBO:


Dell Inc. may be able to leverage its significant foreign cash holdings to assist with a private-equity buyout of the computer manufacturer without triggering the repatriation taxes that have kept it out of the U.S.

Buyers of the company could use the cash as collateral to raise deal financing, and effectively reduce the amount of equity they would have to put into the deal, according to tax and accounting specialist Robert Willens.

Mr. Willens said U.S. tax law makes it difficult for companies with foreign cash holdings to use that money to fund buyouts, as money used directly or indirectly to raise capital is treated as repatriated and therefore subject to being taxed at a 35% rate. But companies are allowed to use up to 65% of their equity in a foreign subsidiary as collateral against a loan without triggering tax payments. That would allow Dell to effectively pledge the cash backing the equity in the subsidiaries to fund the deal.


Amid investor cash, search for yield, covenant-lite loan activity hits record pace


Covenant-lite loans have come at an impressive clip in 2012 amid sustained investor liquidity and the continuing search for yield. Indeed, cov-lite deals – which have less-restrictive incurrence covenants, like high yield bonds, as opposed to more restrictive maintenance covenants – account for nearly 30% of loan volume so far in 2012 (this chart looks at first-lien loans only). That’s a record pace, unmatched by even the pre-Lehman 2007 period, when the capital markets were at their frothiest.

By volume, 2012 cov-lite activity is impressive, though it likely will not match the record set in 2007, despite some hefty deals. Here’s the 10 largest cov-lite loans this year:

Issuer (date) Private Equity? Purpose Amount (bils) Fortescue Metals (11/12) no Refinancing $5.000 Ineos (5/12) Ineos Capital Refinancing $2.375 Chesapeake Energy (12/12) no Refinancing $2.000 Bausch & Lomb (5/12) Warburg Pincus Acquisition $1.935 Getty Images (10/12) Carlyle Group LBO $1.900 ADS Waste Holdings (10/12) Highstar Capital Acquisition $1.800 Hamilton Sundstrand (12/12) Carlyle Group LBO $1.675 MGM Resorts (1/13) no Refinancing $1.500 RedPrairie (12/12) New Mountain Capital Acquisition $1.450 Level 3 Financing (8/12) no Refinancing $1.415

You can read about how covenant-lite loans work here, in LCD’s from Loan Market Primer. – Steve Miller