January 5, 2017

Thomson Reuters LPC Leveraged Loan Monthly – December 2016

by Colm Doherty

Key Points:

Primary Market:

  • Leveraged loan issuance climbed to $875 billion in 2016, up 12% from a year earlier and the third biggest year on record.
  • The increase in issuance in 2016 was driven by a sharp jump in refinancing activity, which posted a 25% gain. In contrast, new money volume edged up by only 1%.
  • Breaking out leveraged loan volume into pro rata issuance and institutional issuance, we see that the increase in leveraged loan deal flow was driven by a surge in institutional issuance, which was up 44% year over year. Pro rata issuance in contrast was down 7% .
  • As in the broader leveraged loan market, it was mainly refinancing activity that drove institutional loan issuance higher. Refinancing volume soared by 85% to $221 billion. New money institutional issuance at $200 billion was up 14% compared to  a year earlier.
  • M&A leveraged loan volume  dropped by 18% in 2016 to $270 billion. That said, there were differences in the LBO and non-LBO segments. LBO issuance was up 20% to $88 billion, while the larger non-LBO category was down 29% to $183 billion.
  • The  technology and healthcare share of institutional loan debt outstanding grew in 2016. In turn, technology (13%) and healthcare (10%) remain the biggest sectors in the market, followed by retail (7%).
  • Three companies defaulted in December, with  nearly $800 million of institutional loan debt.  They were TwentyEighty Inc.  ($359 million), La Paloma Generating Co. LLC ($411.7 million) and Cumulus Media ($28.7 million). This brought institutional loan default volume to $17.5 billion in 2016, up from $16.4 billion in 2015. Energy ($6.4 billion), Metals & Mining ($3.9 billion) and Broadcasting & Media ($2.3 billion) were the top sectors in terms of defaults in 2016. The trailing twelve month loan default rate fell to 1.8%.

Secondary Market:

  • Loans posted their best performance in a few years, with open-end loan funds gaining 8.6% in 2016, while the S&P/LSTA loan index returned 10.2%.
  • Secondary market prices climbed again in December. Institutional term loans finished the month up  48 bps to 97.09, while  the flow name SMi100 increased by 35 bps to 99.03. For the year, Institutional term loans gained 401 bps and flow names climbed 242 bps.
  • As of month-end December, 55% of loans are priced at 100-plus, up from 43% a month earlier. On a dollar weighted basis the par-plus share is an even loftier 67%. At the lower end of the price scale, 9% of credits are bid below 90 cents on the dollar.
  • European flow names remain highly priced though they edged 11 bps lower in December to an average bid of 100.46. In full year 2016, European liquid names were up 147 bps.
  • The share of par-plus loans in U.S. CLOs climbed to 65% in December.  At the other end of the price spectrum, the share of loans bid below 90 cents on the dollar fell to 6%. In European deals, the share of par-plus loans is now at 72%.
  • In terms of U.S. new issue CLO league table volumes, Citi led the way in arranging deals, with Credit Suisse Asset Management marginally ahead of GSO Blackstone in managing new deals , and U.S. Bank was the top trustee. In Europe, Citi was the top arranger and GSO Blackstone  topped the manager table.

CLOs / Loan Funds:

  • S. CLO issuance fell for the third straight year, amounting to $72.4 billion in 2016 (157 deals), down from $98.5 billion in 2015. That said, Issuance increased in each quarter of the year, totaling $26.3 billion in 4Q16.
  • S. refinancing and reset volume surged to over $31 billion in 4Q16, taking the full year volume to $39.4 billion from 94 deals. Refinancing volume (excluding resets) amounted to nearly $20 billion, with resets totaling $19.5 billion.
  • AAA discount margins have tightened in both the U.S. and Europe in recent months, though the tightening is more pronounced on European deals. U.S. CLO AAA discount margins averaged 146 bps in December compared to 97 bps for European deals.
  • European CLO issuance climbed €16.8 billion (based on 41 deals) in 2016, up from €13.8 billion (34 deals) in 2015. Though well below pre-crisis highs, it was still the highest level of issuance since 2007.
  • European CLO refinancing volume was €3.9 billion, with all this activity occurring since late September.
  • Assets under management increased to $445 billion for U.S. CLOs and held relatively steady at over €67 billion for European CLOs.
  • Loan funds posted their sixth straight month of inflows, adding $6.8 billion in December. This took inflows to $7.8 billion for 2016, the first positive year since 2013.
  • Loan mutual fund & ETF assets under management (market value) increased to $136 billion in December.

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