August 7, 2017

Thomson Reuters LPC Leveraged Loan Monthly – July 2017

by Colm Doherty

Contents:

  • Leveraged Loan Market Overview
  • Investor Overview
  • CLO Market Analysis
  • List of recent CLOs / League Tables

Primary Market:

  • Year-to-date leveraged loan issuance stands at $772 billion, easily outstripping the $424 billion posted over the same period last year. Refinancing activity has driven the jump in lending activity this year, but unlike last year, a large share of leveraged volume is driven by institutional volume: 68% vs 41% last year.
  • In line with the trend this year, 68% of leveraged loan volume in July was made up of refinancing activity, as issuers take advantage of market demand for yield and cut spreads. New money volume stands at $228 billion year to date.
  • There has been $528 billion of institutional loan issuance recorded so far this year, eclipsing the $177 billion of volume recorded over the same period last year. U.S. high yield bond issuance dropped to $11 billion in July, taking YTD volume past $162 billion. Despite the slowdown in July, issuance for the year is running 21% ahead of last year’s.
  • Refinancing activity remains the driving force behind U.S. institutional issuance this year, with $381 billion of volume, making up a 72% share of YTD issuance. After comprising 20% of issuance at the beginning of the year, the new-money share of institutional volume has ticked up to 36% in 2Q, and 33% in July.
  • The size of the institutional loan market increased to $928 billion in July, an increase of $2.3 billion over the prior month. Outstandings have increased by over $47 billion this year.
  • M&A leveraged loan volume stands at $143 billion YTD, down 6% from the $144 billion recorded over the same period last year. YTD non-LBO activity is down 20% over last year while LBO volume has increased by 32%.
  • Middle market lending volume stands at $85 billion year-to-date, with large middle market making up 80% of volume and traditional middle market adding $17 billion.
  • New issue yields widened in July for a second consecutive month, with large corporate credits averaging 5.26% and middle market yields at 6.44%. After tightening for most of last year into this year, yields ticked up in 2Q with large corporate posting an average yield of 4.73%, and middle market loans 6.16%. Yields have ticked upward with a higher share of lower-rated credits reaching market combined with a rising LIBOR rate.
  • Two retailers defaulted in July amounting to $1.8 billion of institutional loan debt.  They were True Religion Apparel ($471 million) and J Crew Group ($1.37 billion). Year-to-date, institutional loan default volume stands at $15.2 billion. The trailing twelve month loan default rate stands at 1.9%.Thomson Reuters LPC is the one source for comprehensive coverage of the syndicated loan markets worldwide.

Secondary Market:

  • Loan returns were marginally up in July, posting a return of 0.69%, per the S&P/LSTA LLI, while open-end loan funds recorded 0.73%. The index is up 2.6% through July of this year.
  • Secondary market bids ticked higher in July with multi-quote institutional term loans finishing the month at 98 (37 bps higher) and flow names at 98.9 (9 bps higher).
  • The share of loans bid in the par-plus area increased to 65%, from 58% a month ago. At this point last year, the par-plus share stood at 27%. The 101-plus share also increased to 7%
  • The European flow name Lev40 remains richly bid above par, ending July at 100.53.
    A year ago, the Lev40 was at 99.74.
  • As the average bond bid increased past the 102 mark at the end of July, the yield for U.S. high-yield bonds tightened 22 bps to 5.46%, according to the Bank of America Merrill Lynch High Yield Index. Yields have tightened 70 bps so far this year.

CLOs/Loan Funds:

  • After posting the largest monthly issuance for the year in June, CLO new issue declined to $7.9 billion in July, taking YTD volume past $60 billion. YTD new issue volume is 89% ahead of volume at the same time last year.
  • There was $11 billion of refinancing activity in July with $5 billion in refinancings spread over 12 deals, and $6 billion in reset activity from 13 deals. YTD, there has been over $111 billion of combined refinancing and reset activity.
  • CLO AAA discount margins were flat in July to an average of 125 bps (based on deals where discount margins were available).
  • Four new issue CLOs totalling €1.6 billion priced in the European market in July taking YTD volume to €10 billion spread over 25 deals, in line with the € 9.7 billion of recorded volume over the same period last year.
  • There was € 2.9 billion of combined refinancing and reset activity for European CLOs in July, in line with the previous month. This was split with €1.4 billion of reset volume, spread over 4 deals and €1.6 billion of refinancings. Year-to-date, combined refinancing and reset volume stands at almost €16.8 billion.
  • European CLO AAA discount margins ticked up in July to an average of 91 bps (based on deals where discount margins were available.
  • Assets under management are now at $459 billion for U.S. CLOs and €70 billion for European CLOs.

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