May 5, 2017

Leveraged Loan Monthly – April 2017

by Colm Doherty

Thomson Reuters LPC

Leveraged Loan Monthly – April 2017

Contents:

  • Leveraged Loan Market Overview
  • Investor Overview
  • CLO Market Analysis
  • List of recent CLOs / League Tables
  • Loan Fund Flows & Returns

 

Key Points:

Primary Market:

  • Leveraged loan issuance is at $427 billion year to date, up from $204 billion in the same period a year ago. A big change from last year is that the share of issuance comprised of institutional loans is much higher this year (72%) compared to last year (35%).
  • Refinancing activity once again dominated in April as issuers took advantage of market technicals to cut spreads. Refinancings have accounted for 75% of lending so far in 2017.
  • Institutional loan issuance has surged to $310 billion this year. As in the broader leveraged loan market, institutional issuance so far in 2017 has been driven by refinancing activity. Roughly 77% of the $310 billion of institutional volume consists of refinancings.
  • New money institutional loan issuance has amounted to $72 billion year to date, up from $57 billion in the same period a year ago. Breaking out the $72 billion of new money issuance, we see that M&A (excluding LBOs) accounts for $27 billion, with LBOs at $20 billion and other purposes at $24 billion.
  • The top three sectors in terms of loan issuance this year are technology, financial services and healthcare.
  • M&A leveraged loan volume is at $64 billion so far in 2017, down from $91 billion in the same period last year. LBO and non-LBO activity have amounted to $26 billion and $38 billion, respectively.
  • European leveraged loan issuance is at $58 billion year to date, with refinancings amounting to $36 billion and new money volume at $22 billion. New money volume is down from $28 billion at the same point a year ago.
  • Loan spreads in the large corporate market edged higher in April as more lower rated issuers came to the market.  In comparison, middle market spreads continued to tighten. Contractual spreads in the large corporate market averaged 362 bps in April, up from 344 bps in 1Q17. Middle market spreads averaged 468 bps.
  • After tightening in recent quarters, new issue yields have ticked higher in 2Q17 to date, with large corporate credits averaging 4.97% and middle market yields at 6.41%. The driver of the uptick in yields is the higher share of lower rated deals recently plus a higher LIBOR rate. So far in 2Q17, 15% of deals have been for BB-rated borrowers, down from 20% in 1Q17. In comparison, the share of B-rated credits have increased to 73% this quarter, up from 65% in 1Q17.
  • Four companies defaulted in April, with $1.9 billion of institutional loan debt.  They were AFGlobal Corp ($662 million), Payless Inc. ($665 million), Panda Temple Power LLC ($380 million) and Sprint Industrial Holdings LLC ($220 million).  This brought institutional loan default volume to $9.7 billion YTD. The trailing twelve month loan default rate remains at 2%.

 

Secondary Market:

  • Open-end loan funds and the S&P/LSTA index gained 0.33% and 0.44%, respectively, in April. Year to date, 0pen-end loan funds have returned 1.34% on average and the index is up 1.59%.
  • Secondary market prices were relatively stable in April with multi-quote institutional term loans finishing the month at 97.82 and flow names at 99.04.
  • As of month-end April, 64% of multi-quote institutional loans are priced in the par-plus area and on a dollar weighted basis the par-plus share is an even higher 71%. At the lower end of the price scale, 7% of credits (5% dollar weighted) are bid below 90 cents on the dollar.
  • European flow names remain highly priced at  an average  of 100.35. A year ago, the Lev40 was at 99.56.

 

CLOs / Loan Funds:

  • S. CLO new issue volume posted its best month since November, with deal flow totaling $10.2 billion from 17 deals in April, up from $8.3 billion (15 deals)  in March, taking YTD issuance to $27.6 billion.
  • Refinancing activity remained at an elevated level in April.  U.S. CLO refinancings totaled $15.1 billion from thirty-three deals and resets amounted to $5.1 billion from eleven deals. This took YTD refinancing and reset volume to $69.7 billion.
  • CLO AAA discount margins tightened again in April to an average of 125 bps. The tightest AAA margins were at 118 bps.
  • Four new issue CLOs totaling €1.5 billion priced in the European market in April, taking YTD volume to €4.4 billion from eleven deals.
  • The one European deal for which the AAA discount margin is available in April priced at 85 bps.
  • Assets under management is now at $451 billion for U.S. CLOs, while European CLOs are at €67 billion.
  • Retail loan funds added $1.7 billion (through April 26 and based on funds that report weekly), taking YTD inflows to $15 billion.  Since the middle of last year, loan funds have added pulled in $30 billion.
  • Loan mutual fund & ETF assets under management (market value) continued to climb in April though the pace eased from prior months, reaching $152 billion.
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