CLO Investors Flocking to AAA Paper

While the Volcker Rule gets blamed for the sudden lull in CLO issuance in January and February, it’s now getting some credit for helping one aspect of the roaring comeback of collateralized loan obligations: the infusion of new primary investors in AAA tranches.

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Steel Dynamics Plans Debt For Acquisition

– Steel Dynamics, one of the nation’s largest steel producers, plans on issuing new debt to help finance an announced $1.63 billion acquisition of a steel plant from Severstal OAO.

Regency Energy Plans $500M HY Sale

– Regency Energy Partners is selling $500 million in senior notes due 2022. The Dallas-based natural gas provider plans to use the proceeds to repay outstanding revolver debt.

CITGO’s $2.3B in New Debt Pricing Soon

– CITGO Petroleum is close to pricing its $2.3 billion in loans and bonds to refinance is existing senior credit facility and pay for a $300 million dividend.

Babson: 2Q CLO Issuance Inverses 1Q Spread Trends

– In a reversal from first-quarter trends, Babson Capital reports that spreads tightened slightly in both the U.S. and Europe for AAA paper in CLO 2.0 issues while lower-rated mezzanine tranches saw widening spreads of 20 bps.

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    Featured Articles

    Zebra to Swallow $3.45B Elephant

    – Zebra Technologies agreed to purchase the enterprise business of Motorola Solutions, which had sales of $2.5 billion in 2013, for $3.45 billion in an all-cash transaction. Motorola's enterprise sales are more than twice those of Zebra.

    S&P: Long-Range Risk in Deluge of New ‘B’ Issuers

    – A record rise in the number of first-time, single “B”-rated issuers has Standard & Poor’s concerned that a greater number of companies will be at risk of default in the event of a slowdown in the U.S. economy

    Investors Stand Firm on Non-Call Periods

    – Just when you thought that risky corporate borrowers were getting away with everything, investors are demonstrating that have at least a little fight left in them. High yield bonds are in such high demand that investors have been willing to give up all kinds of protection in order to put their money to work. But non-call periods are a line in the sand.

    Moody’s Turns Negative on Gaming

    – Moody’s Investors Service downgraded its outlook on regional casino operators, to negative from stable after 15 of 18 states reported declining year-over-year gaming revenues for consecutive months. The weaker-than-expected results were surprising.

    Verso Sweetens Exchange Offer

    – Verso Paper is making another go of an exchange offer it needs to complete before it can close its acquisition of NewPage Holdings. A similar exchange offer earlier this year failed to get enough support from bondholders.

    Sprint May Be Phoning the Debt Markets Soon

    – Analysts believe the former junk bond record-holder is getting ready to put a lot more debt on the market in its efforts to secure a $32 billion merger with T-Mobile.

    Precedent Set Quickly in Hot M&A Market

    – Corporations are flush with cash and debt markets are eager to provide additional capital for acquisitions. That makes it increasingly easy for borrowers to negotiate favorable terms, according to William Schwitter and Michael Chernick, both partners with the law firm of Paul Hastings.

    The Unlikely Champions of "Qualified" CLO: European Central Bankers

    – CLO managers have been lobbying hard to shape rules requiring them to keep ‘skin in the game.’ Now they are getting support from an unlikely source – European central bankers.

    Leveraged Finance Markets a ‘Macro Game’

    – Corporate borrowers were still in the driver’s seat in the first half, even if they didn’t raise as much money in the high yield bond and leveraged loan markets as they did a year earlier. With demand strong and defaults low, participants expect to see the same pace in the second half, driven by a similar mix of refinancing, strategic acquisitions and leveraged buyouts.

    Interpreter Service Treads Thin Line

    – Language Line, which recently pulled its $785 million loan proposal from the market, faces a round of near-term debt obstacles that have raised red flags and downgrades from ratings agencies. Of primary concern are a series of upcoming leverage ratio step-down covenants on its existing debt the agencies believe will be problematic without refinancing or term changes from lenders.

    Monroe Capital Suing Former Partner

    – Monroe Capital is suing a former managing director and fund partner, alleging he is tried to take clients for a new firm while he was still employed by Monroe. Monroe said in a complaint that Warren Woo accessed information at Monroe that was beyond his authorization and transferred this data to his new firm via emails.

    OCC Shines Light on Auto, Leveraged Loan Risks

    – The Office of the Comptroller of the Currency sounded the alarm again Wednesday about two key areas in which it sees heightened risks from expanding portfolios: indirect auto lending and leveraged lending.

    In Hot Euro HY Market, Non-European Issuers Rare

    – Europe’s junk bond market may be red hot, but it has not been attracting many non-Europeans lately. And this pace is being sustained despite a slowdown in buyouts of multinational companies by private equity firms, an important driver of 2013 volume. Still, issuance of European high yield bonds is on pace to reach an all-time high this year.

    Freedom May Be What Tribune Needs

    – Newspaper ad spending and circulation are on a permanent decline, and publications are a shrinking slice of revenue for media conglomerates - which is why Tribune Publishing is being spun off from Tribune Co. But according to Moody's, the new Tribune newspaper company and other spinoffs may find they can better invest in their own growth as independent firms, aided by loan market investors who have not shied away from newspaper groups.

    Mega Deals Up Defaults for LBO Firms

    – When it comes to buyouts, bigger is not necessarily better. Moody’s Investors Service posits that, while companies taken private before the credit crisis are no more likely to default than other below-investment grade companies, the biggest buyouts have fared much worse.

    More Bankruptcy Hurdles for Hedge Funds

    – A ruling that blocked hedge funds from voting in a bankrupt shopping center's reorganization plan in Washington state has spread like brush fire in legal and investor circles, with worries about the potential precedence it might set for holders of distressed debt in Chapter 11 plans.

    Investors Embrace Gates Buyout

    – Regulators might have a problem with highly leveraged buyouts, but investors don’t. They are embracing the Blackstone Group’s buyout of industrial products maker Gates Global despite the fact that the deal’s leverage exceeds lending guidance.

    Chesapeake Oilfield Goes It Alone

    – Chesapeake Energy’s spinoff of its oilfield operations will streamline the Oklahoma City-based natural gas provider and relieve it of $1 billion in debt. But investors had better hope that the new company continues to do the same amount of business with its former parent or quickly diversifies its customer base.

    Institutionalized: High Yield ETFs Fill Trading Gap

    – Institutional investors are increasingly accessing the junk bond market indirectly, via exchange traded funds, as opposed to buying and selling the bonds themselves.This increases the potential for ETFs, which are baskets of securities that trade on an exchange, like stocks, to influence the pricing of junk bonds.

    Lending Guidance’s Hidden Impact?

    – Recent reports from analysts at Deutsche Bank and Keefe, Bruyette & Woods - as well as comments from a top Fed supervisory official last month - raised doubts that leveraged lending guidance has yet to have on impact on bank lending practices. But not all agree, noting that aggregate deal data does not reflect trends toward lower deal sizes, more upfront borrower equity and a growing number of loan denials all due to regulatory concerns.

    Caesars Bonds Continue to Lose Ground

    – Bonds of various entities of Caesars Entertainment Group (CEC) continue to be among the most actively traded bonds on the high yield market and are among the bond taking the biggest losses. They have continued to lose ground in the wake of a company downgrade and months-long struggle over the position of its assets.

    Lender Impasse Blocking RadioShack's Makeover

    – RadioShack, fresh off a Super Bowl ad that poked fun at its obsolete reputation, had plans to close 1,100 of its lower-performing stores this year. But the company's lenders balked at the strategy—and have thrown in serious doubt the retailer’s chances of fixing its business model, much less its old dowdy look.

    More SBA Lending Brings Profit and Risk

    – Small banks are breaking out of their comfort zone and establishing new business lines with a little bit of help from the Small Business Administration. More community banks are offering SBA loans far beyond their local markets.

    Not Just TXU: LBO Defaults Rise

    – The LBO default cycle is ticking up even without the big push from the former TXU, though many private equity-backed companies will continue to win reprieves thanks to yield-hungry investors willing to help refinance debt for the time being.

    Credit Bidding Under Attack - Again

    – Two years ago, the U.S. Supreme Court seemingly affirmed the right of secured debtholders to use a lien on a borrower’s assets as currency in “363” corporate bankruptcy sales. Now, legal experts aren’t so sure—and believe that federal judges may again be calling into question the right of a lender or a secondary creditor to “bid” the full value of their claims in Chapter 11 cases.

    Floating-Rate HY Bonds Popular, For Now

    – Until recently, junk bonds have had trouble competing with loans because investors feared that rising interest rates would make bond’s fixed interest rates less attractive. So many borrowers in both the U.S. and Europe have instead been offering bonds with rates that are pegged to Libor or Euribor, just like leveraged loans.

    TransDigm Digs Deep for Dividend

    – The leveraged loan and junk bond markets may not be as hot as last year, but a single-B company can still sell billions to put towards multiple dividend payments. TransDigm Group went to the credit markets and raised funds for a payout to shareholders.

    Outflows Don’t Scare Loan, HY Investors …Yet

    – Loan fund managers are responding cautiously to the first outflows in years. While few have had to sell holdings to meet redemptions, many are becoming more selective about where they put their money to work, and some are building up their cash reserves. Redemptions have exceeded purchases for four of the past five weeks.

    CLOs Waste No Time in 'Volckerizing'

    – Collateralized loan obligations have two years to become compliant with the Volcker Rule or lose their biggest investors – banks -- but some CLO managers aren’t wasting any time. They are not only divesting any bonds backing these deals, they are also eliminating the ability to invest in bonds in the future.

    Downgrades Not What They Used To Be

    – Downgrades of speculative-grade companies were on the rise in the first quarter of 2014—and despite concerns about unrewarded risk that investors are undertaking, there seem to be few concerns the trend is steering the market toward greater default risk.


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Matthew Natcharian

Head of Structured Credit

Firm: Babson Capital Management

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