Teaching your college kids about money

Lpc european leveraged loans pick up pace in run up to year end

Nov 24 Europe's leveraged loan market has been flooded with deals in the run up to year-end creating the busiest period since January, giving banks and investors the opportunity to put new money to work after a relatively quiet year. There are 12 deals in the market and some bankers predict another ten are due to launch before the end of the year. It comes after a busy November, which has already seen a large number of deals close and allocate onto the secondary loan market. The durability of the loan market following Brexit and Trump's surprise election and the sheer amount of liquidity available has prompted borrowers to issue loans while there is good visibility. A number of repayments to the loan market and new money raisings has led to vast amounts of money to put to work. The supply demand imbalance has been aggravated further by the improved CLO bid, as Triple As reprice lower, enabling CLOs to invest in lower yielding loans. The recent deal flow includes a mix of buyout loans, add-ons and dividend recapitalisations, providing a welcome break to the swath of repricings that picked up pace in September, which took up a lot of time but offered no solace to investors and bankers eager to invest in new paper."With the Triple A pricing coming down so quickly on CLOs and a lack of supply, it has allowed sponsors to line up buyout loans, refinancings, add-ons and dividends. The opportunistic stuff really started in October and that momentum has increased, so borrowers are pushing a little further. Why would borrowers want to miss out on the window, Christmas can do all sorts of things to the market," a syndicate head said. Borrowers are looking at deals including a 475m dividend recapitalisation for Dutch discount retailer Action; a 447m buyout financing for German residential and technical lighting products maker SLV and a 200m add-on for French medical diagnostics company Sebia.

Other recent popular deals include a 600m add-on for French veterinary pharmaceuticals firm Ceva Sante Animale and a 600m term loan for Liberty Global-owned telecommunications company UPC, both of which allocated this week. Although the deals are helping to ease the supply/demand imbalance in the market, they are unlikely to be a real test to liquidity."These deals will all get soaked up. Ceva, UPC, Action, they definitely help but we need some big deals and more new paper," an investor said.

ON THE WAY Deals coming the market include a 2bn leveraged loan financing to back Advent International's acquisition of French aerospace company Safran's biometrics and security business Morpho. Although a portion of this will be a refinancing of Oberthur Technologies' debt, as Morpho and Oberthur merge, there will still be a new money element. The deal had an early bird and will launch to general syndication on Monday. Other deals to come include a leveraged loan financing backing CVC-owned private hospitals operator Elsan's acquisition of French competitor MediPole Partenaires, which will take out 715m of high yield bonds; around 300m of loans backing Ardian's buyout of pharmaceutical firm Unither; and 250m of loans backing Bridgepoint's acquisition of Sapec Group's Agro Business.

Some 1.5bn of leveraged loans are also being lined up to back a potential sale of European web hosting provider Host Europe Group to web hosting firm GoDaddy, after the two companies entered exclusive talks. Banks - expected to include Barclays, Citigroup, Deutsche Bank, Morgan Stanley and RBC - are lining up the financing, which could launch before year-end, if a deal is struck. Elsewhere, banks are committing to underwrites for auction processes, which if successful could see a swath of leverage buyout loans hit the market in January. This could be for companies including German bandage and plaster cast maker BSN Medical, British holiday park operator Parkdean Resorts French laboratory business Cerba."It is not looking terrible for next year. There could be a decent, improved amount of supply but it won't bring about a complete change to the technical picture," the investor said. After that, the picture doesn't look too optimistic. The market has tightened over the past couple of months, making many of the repricings done in September and October out of sync with the more recent, tighter yielding credits. Once soft-call is up, the market could see a second wave of repricings come February/March time.

Lpc prolonged fed rate hike wait discourages loan fund buyers

Retail investors will keep dragging their heels before returning as consistent buyers of floating-rate loan funds, now that surprisingly weak U.S. jobs growth has further prolonged the wait for Federal Reserve rate hikes, analysts and investors said. Pegging demand to the prospect of rising interest rates, retail buyers have been sporadically adding to leveraged loan funds in anticipation of the Fed’s follow-up to the December 2015 hike, which was the first in almost a decade. April’s tepid U.S. jobs report, however, dashed expectations for a June Fed move. In response, most economists now expect a hike no sooner than September, according to a Reuters poll. The soft economic indicator also prompted some banks to lower their interest rate hike expectations for this year to one from two before the report.“With Fed rate hikes moving at a snail’s pace, a primary motivator for investors seeking inflation protection - the rate reset feature of loans – is greatly diminished,” said Jeff Tjornehoj, head of Americas Research at Lipper. Retail investors yanked US$6.4bn from loan mutual funds and exchange traded funds this year through May 4, the latest Lipper data show, on the heels of withdrawing US$21.6bn in full-year 2015.“While we’re very unlikely to see the US$20bn-plus outflows of the previous few years, these funds will continue to struggle with redemptions this year,” said Tjornehoj.

High-yield bond funds, in contrast, have pulled in US$10.5bn this year after losing US$16.4bn in 2015. TOO FAR TOO FAST Loans in the secondary market have jumped since mid-February on the back of bargain-hunting as oil and stock prices gained, but have been treading water for the past three weeks. The average bid in the SMi100, the 100 most liquid loans, was 98.1 cents on the dollar on May 9, wavering little since April 21. The bid stagnated after spiking quickly from a recent low of 95.3 cents on February 22.

The rally stalled on the new signs reminding market players of the long-playing story: slow U.S. economic growth signaling low interest rates for even longer. Without imminent rising rates, floating-rate loan prices have escaped a big drop because of increased demand from Collateralized Loan Obligation (CLO) funds, the biggest leveraged loan buyers, and dealflow that has been slowed by volatility and economic uncertainty. Institutional loan issuance sank to a four-year low of US$39bn in the first quarter, according to Thomson Reuters LPC data.

CLO creation, although growing, will be sharply lower than in 2015, limiting the prospect of further loan price increases. Wall Street forecasts span from US$35bn to US$60bn of CLO volume, sharply below US$98.5bn last year. The loan rally, similar to high-yield bonds, has “run too far too fast, and will likely undergo a correction,” according to BofA Merrill Lynch Global Research. However, loans ultimately will post positive returns this year, outperforming negative returns on high-yield bonds, the analysts wrote in the May 11 report.“As investors are faced with increasing credit risk on the back of poor high-yield fundamentals and a deteriorating economy, we see them migrating up the capital structure into the relative safety of senior secured paper,” they said.