October 6, 2017

Leveraged Loan Monthly – September 2017

by Hugo Pereira

Thomson Reuters LPC

Leveraged Loan Monthly – September 2017

Contents:

  • Leveraged Loan Market Overview
  • S. High Yield Bond Market Overview
  • Investor Overview
  • CLO Market Analysis
  • List of recent CLOs / League Tables
  • Loan Mutual Fund Flows & Returns

Primary Market:

  • There was $242 billion of leveraged loans issued in the third quarter, a 10% increase compared to 3Q16 but a 31% decrease over the previous quarter. YTD leveraged volume stands at $994 billion, outstripping the $601 billion posted over the same period last year. The growth in lending this year has been driven by institutional issuance (up $393 billion year over year), while pro-rata volume has been flat YOY at $346 billion for a 35% share of volume.
  • There was $142 billion of institutional loan issuance in 3Q, a 35% drop from the previous quarter but 51% higher compared to 3Q16.  YTD volume stands at $651 billion, outpacing the $257 billion recorded over the same period last year. U.S. HY bonds added $34 billion of volume in September, taking YTD volume to $214billion. Bond issuance for the first three quarters of the year is running 19% ahead of last year’s levels.
  • Institutional loan issuance has been driven by refinancings for most of the year, with $441 billion in YTD refi volume for a 68% share. After making up roughly one-fifth of volume in the beginning of the year, institutional new money activity has been edging higher and made up 72% of institutional volume in September.
  • The size of the institutional loan market increased $8.4 billion to $938 billion in September. Outstandings have risen $58 billion since the start of the year.
  • Driven by a busy September, there was $78 billion of M&A leveraged loan volume in 3Q17, down 11% from the previous quarter. At $220 billion, issuance levels this year are 5% off from last year’s, with LBOs making up a higher share of volume this year.
  • Middle market lending added $31 billion of volume in 3Q, taking year-to-date issuance past $114 billion, 14% ahead of last year’s issuance levels.
  • Toys R Us was the sole default in September with $1.2 billion of loans at stake. Year-to-date, institutional loan default volume stands at $16.4 billion. The trailing twelve month loan default rate ticked up to 1.8%.

Secondary Market:

  • Leveraged loans posted a small return of 0.39% in September, according to the SP/LSTA LLI, while open-ended loan funds recorded a 0.4% return. Year-to-date, the index is up almost 3%.
  • In the secondary market, average bids for multi-quote institutional loans edged 12 bps higher in September to 98.12. They are risen by over a point since the beginning of the year. The flow-name Smi100 ended the month at 98.29.
  • Over the course of September, the share of loans priced at or above 101 ticked down to 5% while the share priced at or above par increased to 61%.
  • The European flow name Lev40 was flat in September, ending the month in the 100.36 context. Although average levels for European flow names have increased over the past year, they are down 10 bps since the beginning of the year.
  • Yields in the U.S. high-yield bond market dropped again in September ending the month at 5.4%, according to the Bank of America Merrill Lynch High Yield Index. Yields have tightened 73 bps this year as the average bid increased by over 2 points to the 101.8 context.

CLOs/Loan Funds:

  • There was $9 billion of new issue CLO volume in September, taking YTD issuance to $82 billion, outpacing the $72.4 billion in volume recorded in 2016. Activity in the third quarter was down 16% over the previous quarter, with $29.6 billion of new issue CLOs printed.
  • After a busy first half of the year, U.S. refinancing and reset activity has begun to trend downward over the course of 3Q, as fewer Crescent-letter eligible deals remain. September added $7.6 billion of refi and reset activity taking 3Q to $27.2 billion, making it the slowest quarter this year. Nearly $39 billion of CLOs have reset in 2017, compared to almost $89 billion in refinancing activity.
  • Four new issue CLOs totalling €1.6 billion priced in September taking YTD volume to €12 billion spread over 31deals. Issuance levels this year remain in line with volume recorded over the same period last year.
  • There was €2.5 billion of combined refinancing and reset activity in the European CLO market for September. This was split between €1.3 billion in reset volume and €1.2 billion of refinancings. Year-to-date refinancing and reset volume stands at €20.6 billion.
  • For September, U.S. CLO AAA discount margins stand at 123 bps, DMs for European CLOs stand at 87 bps.
  • Assets under management are now at $473 billion for U.S. CLOs and €70 billion for European CLOs.
  • Retail loan funds recorded $365 million of outflows in September (based on funds that report weekly). For the year-to-date, funds have recorded $16.6 billion of inflows. HY bond funds posted an inflow of $1.8 billion in September (based on funds that report weekly). YTD outflows stand at $11.8 billion.
  • Loan mutual fund & ETF assets under management (market value) ended September at $156 billion.

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