November 9, 2018

Leveraged Loan Monthly – US: October 2018

by Hugo Pereira and Elizabeth Han.

The October 2018 ediiton 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

Primary Market

  • After a slower than average September, leveraged issuance increased to over $110 billion in October. The jump was led by the closing of KKR’s LBO of Envision Healthcare’s and Tenneco Inc’s takeover of Federal-Mogul. There was over $71 billion in institutional issuance, which made up 65% share of monthly volume. YTD leveraged volume stands at over $1 trillion, down 10% YoY, with 63% of activity institutional, in line with last year’s share.
  • Overall leveraged financing increased in October but a drop in high-yield bond issuance combined with an increase in institutional loan volume meant that loans made up the overwhelming share of activity. Institutional loans remain the in favor this year, recording $659 billion in volume, compared to $161 billion in high-yield bonds.
  • The new money share of institutional loans remains elevated in October at 64%. After driving issuance for most of the year, refinancing activity retreated in 3Q, as investors push back on aggressive terms was met with an increase in new-money activity. YTD, 44% of institutional loan volume was new-money purposed.
  • Flex activity remained firmly in favor of borrowers in October with downward flexes outnumbering upward flexes by a factor of three to one. The average downward flex was 37bp, while the average upward adjustment was 81bp.
  • Led by the Chapter 11 filing of long-struggling retailer Sears, there was $1.85 billion of defaulted par in October, taking the year-to-date defaulted par volume to $18.5 billion, in line with activity recorded last year. The trailing-twelve-month default rate continued to tick lower to 2.1 in October.

Secondary

  • Driven by slumping market values, returns on leveraged loans declined to negative 0.03% in October, the first time loans fail to post a positive return since August of last year, according to the S&P/LSTA LLI. Year-to-date loan returns now stand at 4%. Average returns for open-ended loan funds also declined in October to 0.17% and now stand at 3.17% YTD.
  • The average multi-quoted institutional term-loan declined 19bp in October to the 98.2 context, as broader market volatility took its toll across credit markets. Average prices were down 30bp across all institutional term-loans.
  • The share of multi-quote institutional loans priced in the par-plus area declined to 45% at the end of October (it ended September at 61%), while the share priced at or above 101 also ticked lower to 2%. The pull-back in secondary prices saw the share of the secondary that is priced between 99 and 100 increase to 34%, from 20% the prior month. On a dollar-weighted basis, the par plus percentage stands at 39%.
  • Institutional outstandings ended October at a new high-point of $1.119 trillion. Outstandings have increased 17% so far this year.
  • The yield on US high-yield bonds widened to the highest level since 2016, ending October in the 6.89% range, up 65bp over the prior month, according to ICE BAML Index data. The average price tumbled over 2 points in the month to 96.4 at the end of October.

CLO and Loan Funds

  • October CLO new-issue activity ticked up $1.07 billion to $9.55 billion over 19 deals. This is $2.88 billion lower than 2017 issuance over the same period but still behind 2014’s record levels. YTD 2018 CLO volume stands at $109.37 billion, which is 15% or $14.54 billion more than 2017 volume over the same period.
  • CLO repricing activity almost doubled in October with $15.68 billion in total volume of resets and reissues over 32 deals, as issuers moved forward on opportunistic refinancings and resets. 11 deals were refinanced with AAA pricing at 108-117bp, 14 deals were reset with AAA pricing from 115-128bp, and 6 deals were reissued with AAA pricing from 111-130bp.
  • The European CLO market ticked up slightly in October with 6 new issues pricing with a total volume of €2.438bn. 2018 YTD volume stands at €22.88bn, compared with €13.33 billion over the same period in 2017. As investor demand for CLO paper has grown, more US managers have been setting up shop in Europe.
  • Assets under management rose to $579.45 billion for US CLOs and €93.13 billion for European CLOs.
  • Average DMs on CLO AAA liabilities widened across both US and European CLO to their highest levels in 2018, to 118.75bp for US and 98.6bp for Europe. reflecting continued investor appetite in the CLO asset class.
  • High-yield bond funds posted an outflow of $1.5 billion in September but recorded a small inflow for the third quarter, compared to huge outflows in the first half of the year. YTD outflows for HY bonds stand at $23.2 billion. By contrast, loans posted a small inflow of $768 million for September, taking YTD inflows past $15.6 billion, as investors continue to show a high level of demand for floating-rate loans.
  • Breaking loan funds out by their ETF and mutual fund categories, ETFs have registered inflows of $1.1 billion, which has been shadowed by the $14.5 billion of inflows into loan mutual funds.

View this document on LC Reports


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