| ||||||||||
| ||||||||||
— Industry Insight —
The Great '09 Loan Rally shifted into high gear during the second quarter. The Standard & Poor's/Loan Syndications and Trading Association Leveraged Loan Index posted a record 20.38% gain between April and June, surpassing the short-lived high of 9.8% from the first quarter.
It's been a fantastic run, to be sure. After falling a devastating 29.1% last year, the S&P/LSTA Index posted a 32.18% gain over the past six months. Erasing last year's loss was a feat most observers -- ourselves included -- expected to take years. The first half's bull run was a real-life example of Economics 101: Supply dried up as demand increased, pushing prices higher. The numbers are stark. Between March 31 and June 30, the pool of institutional loan assets fell $14.2 billion, or 2.4%, to $568 billion. Alongside the first quarter, it was the biggest quarterly decline in institutional loans on record. All told, the stock of institutional paper has shrunk $27 billion since the year-end reading of $596 billion. That's a 4.7% drop and the biggest six-month decline on record, far exceeding the pre-2009 mark of 3% ($4.4 billion) from November 2001 through April 2002. As these numbers suggest, a severe inventory squeeze has gripped the loan market this year. As supply contracted, demand was propped up by a slew of bond-for-loan takeout deals, inflows into loan mutual funds and cross-over investment by high-yield accounts. The loan bull market of the first half has followed the usual pattern, climbing a wall of worry at first, as accounts scrabbled to the high ground of blue-chip names, eventually fanning out to the lesser lights. Looking ahead, most accounts are starting to feel queasy. The late June retrenchment -- Standard & Poor's Leveraged Commentary & Data's flow names were down 1.6 points, or 1.8%, from June 11 through June 23 -- reflects the mood of the moment. Accounts worry that the market got ahead of itself halfway through the month, with the flow name average touching 86. Accounts think we might be in for a bumpy, and generally rangebound, ride over the summer as reality sets in: Default rates continue to rise, the economy remains in recession, and earnings remain under pressure in many leveraged finance sectors. As well, spreads have gotten to the point where fundraising has become more challenging. All the same, participants generally think the worst is over and that the market will not test the lows of March and December. The glass-half-full crowd argues that, as long as the high-yield market remains strong and continues to support bond-for-loan takeouts, the loan market is likely to follow suit. The bulls also present the following arguments to support their case: The bears, meanwhile, have some strong arguments of their own: Despite the run-up in the secondary, primary activity was little improved in the second quarter. Overall loan volume was, in fact, down slightly, to $14.8 billion from $15.8 billion in the first quarter. Excluding DIPs, however, volume did manage to push to $14.1 billion from $9 billion in the first quarter. For the first half as a whole, volume totaled $31 billion, down from $101 billion during the first six months of 2008. It is the least recorded during a calendar half since LCD started tracking volume numbers in 1997. For the record, the prior low was $45 billion from the second half of 2001. Excluding DIPs, meanwhile, the first-half total was just $23 billion. As for what type of business is getting done, the focus was largely on self-help deals to better-rated issuers. Refinancings, in fact, made half of '09 in the first half. Loans that back M&A trades, meanwhile, accounted for a mere 13.7% of second-quarter activity and 9.1% of first-half business. Still, with loan prices pushing to pre-Lehman level and investors taking in cash, the new-issue window reopened in the second quarter, allowing arrangers to launch 12 legitimate new institutional loans, six of which have printed and broken. There were, of course, some loans that braved the primary between October and March. But these were largely off-the-run deals that fell into two principal categories: It wasn't until May that the market started to see a trickle of regular-way dealflow, with loans printing in the 6%-10% range, all-in. Accounts are giving the first run of '09 model loans good reviews. Indeed, the average break price for these issues was 1.7 points wide of their offer price: 97 versus 98.7. That's the highest break premium ever. As this performance suggests, the '09 loans offer even more investor-friendly terms than the 2008 model deals that cropped up after the credit markets cracked in late 2007. Each of the deals had a LIBOR floor, for instance, and an old-school covenant package. Beyond the fledgling new issue market, issuers were focused on pushing out maturities via amend-to-extend executions. In the second quarter, amend-to-extend has caught fire in the institutional segment. Since April, LCD News has reported on 12 such deals totaling $8.2 billion, bringing the year-to-date tally to 14 deals totaling $11.5 billion. This has pushed maturities of 3% of performing loans back so far this year. In general, amend-to-extend transactions have two phases, as the name implies. The first is an amendment in which at least 50.1% of the bank group approves the issuer's ability to roll some or all existing loans into longer-dated paper. Typically, the amendment sets a range for the amount that can be tendered via the new facility, as well as the spread at which the longer-dated paper will pay interest. The new debt is pari passu with the existing loan. But because it matures later, it carries a higher rate -- usually 1.5%-2.0% wider -- and, in some cases, more attractive terms. The second phase is the conversion, in which lenders can exchange existing loans for new loans. In the end, the issuer is left with two tranches: (1) the legacy paper at the initial price and maturity, and (2) the new facility at a wider spread. The innovation here: Amend-to-extend allows an issuer to term-out loans without actually refinancing into a new credit (which obviously would require marking the entire loan to market, entailing higher spreads, a new OID and stricter covenants). Looking ahead to the third quarter, arrangers expect issuers to remain focused on pushing out looming maturities via amend-to-extend deals as well as bond-for-loan take outs. Steven Miller manages the Standard & Poor's Leveraged Commentary & Data business. |
|
|
|
|
|
