Leveraged loan market analysis (US) - October 2011

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The US leveraged loan market caught a bid in November, though the market remains focused on developments abroad - specifically Italy and eurozone.

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  • This chart shows the average price of LCD’s flow name composite, a measure of the 15 largest, most liquid loans. As the big V to the right makes clear, The market has largely clawed back the devastating losses of late 08/early 09. In recent months it has stabilized, mostly moving sideways. Rather than responding to overall market conditions, names responded to earnings news and sector trends \n
  • This chart shows the average price of LCD’s flow name composite, a measure of the 15 largest, most liquid loans. As the big V to the right makes clear, The market has largely clawed back the devastating losses of late 08/early 09. In recent months it has stabilized, mostly moving sideways. Rather than responding to overall market conditions, names responded to earnings news and sector trends \n
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  • Now we turn to market technicals. This first slide illustrates new-issue volume. As impressive as the increases have been in recent months, for loan accounts, it’s been a case of water water everywhere and not a drop to drink. The primary has been activity, but the vast majority of deal flow has been for refi’s, recaps and exits. True new-issue volume from M&A trades has been in short supply. Which brings us to the chart to the right, which displays the amount of institutional term loans outstanding over time. With repayments persisting at strong rates, the universe of loan paper continues to shrink, by about 2% YTD after an 11% decline in 2009. This inventory squeeze continues to underpin secondary price levels and whet demand for new-issue paper.\n
  • Now we turn to market technicals. This first slide illustrates new-issue volume. As impressive as the increases have been in recent months, for loan accounts, it’s been a case of water water everywhere and not a drop to drink. The primary has been activity, but the vast majority of deal flow has been for refi’s, recaps and exits. True new-issue volume from M&A trades has been in short supply. Which brings us to the chart to the right, which displays the amount of institutional term loans outstanding over time. With repayments persisting at strong rates, the universe of loan paper continues to shrink, by about 2% YTD after an 11% decline in 2009. This inventory squeeze continues to underpin secondary price levels and whet demand for new-issue paper.\n
  • Now we turn to market technicals. This first slide illustrates new-issue volume. As impressive as the increases have been in recent months, for loan accounts, it’s been a case of water water everywhere and not a drop to drink. The primary has been activity, but the vast majority of deal flow has been for refi’s, recaps and exits. True new-issue volume from M&A trades has been in short supply. Which brings us to the chart to the right, which displays the amount of institutional term loans outstanding over time. With repayments persisting at strong rates, the universe of loan paper continues to shrink, by about 2% YTD after an 11% decline in 2009. This inventory squeeze continues to underpin secondary price levels and whet demand for new-issue paper.\n
  • This chart shows the average price of LCD’s flow name composite, a measure of the 15 largest, most liquid loans. As the big V to the right makes clear, The market has largely clawed back the devastating losses of late 08/early 09. In recent months it has stabilized, mostly moving sideways. Rather than responding to overall market conditions, names responded to earnings news and sector trends \n
  • This chart shows the average price of LCD’s flow name composite, a measure of the 15 largest, most liquid loans. As the big V to the right makes clear, The market has largely clawed back the devastating losses of late 08/early 09. In recent months it has stabilized, mostly moving sideways. Rather than responding to overall market conditions, names responded to earnings news and sector trends \n
  • This chart shows the monthly return of the S&P/LSTA index, a broad measure of loan market returns that we calculate in partnership with the Loan Syndications and Trading Association. The main point here is that the loan market managed to eke out a gain in February. The S&P/LSTA index was up .28%, bringing the YTD gain to 2.32%. The loan market has now posted 14 straight monthly advances. Over that period is it up a whopping 55%. \n
  • This chart shows the monthly return of the S&P/LSTA index, a broad measure of loan market returns that we calculate in partnership with the Loan Syndications and Trading Association. The main point here is that the loan market managed to eke out a gain in February. The S&P/LSTA index was up .28%, bringing the YTD gain to 2.32%. The loan market has now posted 14 straight monthly advances. Over that period is it up a whopping 55%. \n
  • It’s not just supportive technicals that have underpinned the loan market. Fundamentals have also been improving. This chart gives a classic view of the loan market’s default rate. It does so by dividing the amount of defaults in any given 12 month period by the amount outstanding at the period began, to give a trend line. After an unprecedented rise in 2009, default rates have started to recede. The reason is threefold. First, many of the weakest issuers in the most troubled sectors have already been claimed by bankruptcy. Second, nearly 2 in 5 issuers have executed a kick-the-can down the road transaction via A2E, bond-for-loan takeout or cov relief. Third, there’s been significant earnings improvement. Among S&P/LSTA issuers that have filed so far, EBITDA was up 10% on average in the Q4\n
  • It’s not just supportive technicals that have underpinned the loan market. Fundamentals have also been improving. This chart gives a classic view of the loan market’s default rate. It does so by dividing the amount of defaults in any given 12 month period by the amount outstanding at the period began, to give a trend line. After an unprecedented rise in 2009, default rates have started to recede. The reason is threefold. First, many of the weakest issuers in the most troubled sectors have already been claimed by bankruptcy. Second, nearly 2 in 5 issuers have executed a kick-the-can down the road transaction via A2E, bond-for-loan takeout or cov relief. Third, there’s been significant earnings improvement. Among S&P/LSTA issuers that have filed so far, EBITDA was up 10% on average in the Q4\n
  • It’s not just supportive technicals that have underpinned the loan market. Fundamentals have also been improving. This chart gives a classic view of the loan market’s default rate. It does so by dividing the amount of defaults in any given 12 month period by the amount outstanding at the period began, to give a trend line. After an unprecedented rise in 2009, default rates have started to recede. The reason is threefold. First, many of the weakest issuers in the most troubled sectors have already been claimed by bankruptcy. Second, nearly 2 in 5 issuers have executed a kick-the-can down the road transaction via A2E, bond-for-loan takeout or cov relief. Third, there’s been significant earnings improvement. Among S&P/LSTA issuers that have filed so far, EBITDA was up 10% on average in the Q4\n
  • To wrap up then, some final points\n\nFirst, the demand for loans remains muscular as a result on high repayment rates and inflows into the loan funds\n\nSecond, The calendar of true new-issue volume remains weak \n\nThird, PE firms and issuers are focused on financial engineering deals\n\nFourth, issuers continue to create financial flexibility through A2E’s and bond take outs\n\nAnd, finally, most participants expect default rates to drop into the middle single digits by yearend. And, indeed, the market is now pricing in a default rate of about 5.5%, right in line with consensus expectations.\n
  • To wrap up then, some final points\n\nFirst, the demand for loans remains muscular as a result on high repayment rates and inflows into the loan funds\n\nSecond, The calendar of true new-issue volume remains weak \n\nThird, PE firms and issuers are focused on financial engineering deals\n\nFourth, issuers continue to create financial flexibility through A2E’s and bond take outs\n\nAnd, finally, most participants expect default rates to drop into the middle single digits by yearend. And, indeed, the market is now pricing in a default rate of about 5.5%, right in line with consensus expectations.\n
  • To wrap up then, some final points\n\nFirst, the demand for loans remains muscular as a result on high repayment rates and inflows into the loan funds\n\nSecond, The calendar of true new-issue volume remains weak \n\nThird, PE firms and issuers are focused on financial engineering deals\n\nFourth, issuers continue to create financial flexibility through A2E’s and bond take outs\n\nAnd, finally, most participants expect default rates to drop into the middle single digits by yearend. And, indeed, the market is now pricing in a default rate of about 5.5%, right in line with consensus expectations.\n
  • To wrap up then, some final points\n\nFirst, the demand for loans remains muscular as a result on high repayment rates and inflows into the loan funds\n\nSecond, The calendar of true new-issue volume remains weak \n\nThird, PE firms and issuers are focused on financial engineering deals\n\nFourth, issuers continue to create financial flexibility through A2E’s and bond take outs\n\nAnd, finally, most participants expect default rates to drop into the middle single digits by yearend. And, indeed, the market is now pricing in a default rate of about 5.5%, right in line with consensus expectations.\n
  • To wrap up then, some final points\n\nFirst, the demand for loans remains muscular as a result on high repayment rates and inflows into the loan funds\n\nSecond, The calendar of true new-issue volume remains weak \n\nThird, PE firms and issuers are focused on financial engineering deals\n\nFourth, issuers continue to create financial flexibility through A2E’s and bond take outs\n\nAnd, finally, most participants expect default rates to drop into the middle single digits by yearend. And, indeed, the market is now pricing in a default rate of about 5.5%, right in line with consensus expectations.\n
  • To wrap up then, some final points\n\nFirst, the demand for loans remains muscular as a result on high repayment rates and inflows into the loan funds\n\nSecond, The calendar of true new-issue volume remains weak \n\nThird, PE firms and issuers are focused on financial engineering deals\n\nFourth, issuers continue to create financial flexibility through A2E’s and bond take outs\n\nAnd, finally, most participants expect default rates to drop into the middle single digits by yearend. And, indeed, the market is now pricing in a default rate of about 5.5%, right in line with consensus expectations.\n
  • To wrap up then, some final points\n\nFirst, the demand for loans remains muscular as a result on high repayment rates and inflows into the loan funds\n\nSecond, The calendar of true new-issue volume remains weak \n\nThird, PE firms and issuers are focused on financial engineering deals\n\nFourth, issuers continue to create financial flexibility through A2E’s and bond take outs\n\nAnd, finally, most participants expect default rates to drop into the middle single digits by yearend. And, indeed, the market is now pricing in a default rate of about 5.5%, right in line with consensus expectations.\n
  • To wrap up then, some final points\n\nFirst, the demand for loans remains muscular as a result on high repayment rates and inflows into the loan funds\n\nSecond, The calendar of true new-issue volume remains weak \n\nThird, PE firms and issuers are focused on financial engineering deals\n\nFourth, issuers continue to create financial flexibility through A2E’s and bond take outs\n\nAnd, finally, most participants expect default rates to drop into the middle single digits by yearend. And, indeed, the market is now pricing in a default rate of about 5.5%, right in line with consensus expectations.\n
  • You’ve all seen this before, it’s a disclaimer that is long and quite detailed. Please read it at your leisure\n
  • Leveraged loan market analysis (US) - October 2011

    1. 1. Leveraged loan secondary market prices,YTD10097 93 90 861/11 2/11 3/11 5/11 6/11 7/11 8/11 10/11 Source: Leveraged Commentary & Data
    2. 2. Leveraged loan returns vs. high yield bonds, equities10% S&P/LSTA Index S&P 500 ML High Yield (H0A0) 4%-2%-8% 1/11 2/11 3/11 4/11 5/11 6/11 7/11 8/11 9/11 10/11 Source: Leveraged Commentary & Data
    3. 3. Change in loan outstandings vs. loan fund inflows, CLO issuance15 Change in outstandings CLO Issuance/Prime Fund Inflows11 8 4 0(4) (8)(11) 1/11 3/11 5/11 7/11 9/11 10/11Source: Leveraged Commentary & Data
    4. 4. Average yield, new-issue leveraged loans (%)8.507.38 6.25 5.13 4.00 6/10 9/10 12/10 3/11 6/11 9/11 Source: Leveraged Commentary & Data
    5. 5. Forward calendar: M&A loans in the pipeline ($bils)251913 6 0 1/11 2/11 3/11 4/11 5/11 6/11 7/11 8/11 9/11 10/11 Source: Leveraged Commentary & Data
    6. 6. Default rate for leveraged loan issuers (%)4.03.02.0 1.0 0 9/10 11/10 1/11 3/11 5/11 7/11 8/11 Source: Leveraged Commentary & Data
    7. 7. • CLO Where opens, slightly And what’s ahead? window are we now?• CLO window opens, slightly• 4 such deals recently: Credit Suisse Asset Mgmt Sankaty Guggenheim Welsh Carson Fraser Sullivan• Fourth-quarter new issues? Cupboard is bare• First-quarter 2012? Maybe some pickup• It’s all about EuropeSource: Leveraged Commentary & Data
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