June 7, 2017

Leveraged Loan Monthly – May 2017

by Colm Doherty

Thomson Reuters LPC

Leveraged Loan Monthly – May 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 $531 billion year to date, easily outstripping the $264 billion posted in the same period a year ago. This is the second highest YTD total through May, only slightly lagging the record set in 2013. The growth in lending volume this year has been driven by refinancing activity. In addition, there has been a large shift as the share of leveraged issuance comprised of institutional loans has grown to 70%, up from 35% last year.
  • The majority of leveraged lending (63%) was once again comprised of refinancings in May. So far in 2Q17, refinancing activity while still elevated has declined to 66% of lending from 76% in 1Q17. New money volume is at $147 billion year to date.
  • Institutional loan issuance has rocketed to $384 billion this year, far outpacing the $94 billion recorded at the same time last year and is already not too far off the full year 2016 figure of $421 billion. Only 27% of the $384 billion of institutional volume represents new money financing. That said, the new money share increased in May to its highest level this year (45%).
  • Though refinancings have dominated in 2017, new money institutional loan issuance has increased year over year. New money volume is at $105 billion year to date, up from $67 billion in the same period a year ago. Breaking out the $105 billion of new money issuance, we see that M&A (excluding LBOs) accounts for $44 billion, with LBOs at $33 billion and other purposes at $28 billion. In May, there was a pick up in both M&A and LBO volume.
  • The size of the institutional loan market increased in May to $901 billion, a gain of $10 billion from the prior month , pushing year to date growth to $20 billion.
  • M&A leveraged loan volume is at $94 billion so far in 2017, down from $107 billion in the same period last year. Non-LBO activity fell to $52 billion from $80B in the corresponding period last year. In contrast, LBO issuance increased to $41 billion, up from $26B a year ago.
  • The top three sectors in terms of loan issuance this year are technology, financial services and telecom.
  • European leveraged loan issuance is at $63 billion year to date, with refinancings amounting to $45 billion and new money volume at $18 billion. New money volume remains limited and is roughly only half of what it was at the same point a year ago.
  • After ticking higher in April, U.S. new issue yields tightened in May, with large corporate credits averaging 4.61% and middle market yields at 5.96%. So far in 2Q, yields remain higher than the prior quarter at 4.8% for large corporate and 6.17% for middle market. The driver of the uptick in yields on a quarterly basis 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 May, with $1.8 billion of institutional loan debt.  They were 21st Century Oncology Inc.  ($602.4 million), rue21 Inc. ($521 million), Total Safety US Inc. ($405 million), and Mood Media Corp. ($228.5 million). This brought institutional loan default volume to $11.4 billion YTD. The trailing twelve month loan default rate slipped to 1.8%.

Secondary Market:

  • Loan returns in May were similar to those seen in the previous month. Open-end loan funds and the S&P/LSTA index gained 0.34% and 0.37%, respectively. Year to date, 0pen-end loan funds have returned 1.71% on average and the index is up 1.96%.
  • Secondary market bids have climbed this year, though prices ticked marginally lower in May, with multi-quote institutional term loans finishing the month at 97.71 and flow names at 98.91.
  • The secondary market remains highly bid, with 66% of loans bid in the par-plus area (and 68% on a dollar weighted basis). At this point a year ago, the par-plus share stood at a much lower 23%.
  • European flow names remain highly priced, having climbed to an average of 100.74. A year ago, the Lev40 was at 99.86.

CLOs / Loan Funds:

  • S. CLO new issue remained active, posting $9.8 billion of volume in May, slightly down from the $10.2 billion reported the prior month and taking YTD issuance to $37.5 billion (67 deals). At this time last year, CLO issuance was lower at $19.6 billion from 47 deals.
  • Refinancing activity dropped in May with refinancings adding $5.1 billion from twelve deals, and resets $3.4 billion from six deals. May marked the first month this year where new issue outpaced refinancing volume. Combined YTD refinancing and reset volume stands at over $80 billion.
  • S. CLO AAA discount margins were marginally higher in May at an average of 128 bps (based on deals where discount margins are available).
  • Six new issue CLOs totaling €2.4 billion priced in the European market in May, taking YTD volume to €6.7 billion from seventeen deals. At this time last year, issuance stood at €5.6 billion from 14 deals.
  • European CLO pricing was flat with the average AAA discount margin ticking up to 87 bps in May.
  • Assets under management are now at $447 billion for U.S. CLOs and €68 billion for European CLOs.
  • Retail loan funds added $971 million in May (based on funds that report weekly), taking YTD inflows past $16 billion.  Since the third quarter of last year, loan funds have added over $31 billion. Notably, the last week of May saw the first weekly outflow ($107 million) since November 2016.
  • Loan mutual fund & ETF assets under management (market value) continued to climb in May, ending the month at nearly $154 billion.
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