Tag Archives: Leveraged Loans

Record Numbers Of Companies Drown In Debt To Pay Dividends To Their Private Equity Owners, by Tyler Durden

Posted on September 21, 2020 | Leave a comment

One day many of the practices described in this article will be illegal. From Tyler Durden at zerohedge.com:

One week ago we used Bloomberg data to report that in the latest Fed-fuelled bubble to sweep the market, now with Powell buying corporate bonds and ETFs, private equity firms were instructing their junk-rated portfolio companies to get even deeper in debt and issue secured loans, using the proceeds to pay dividends to owners: the same private equity companies. Specifically, we focused on five deals marketed at the start of the month to fund shareholder dividends, which accounting for half of the week’s volume, and the most in a week since 2017, according to Bloomberg.

Now, a little over a week late, the FT is also looking at these dividend recap deals which have become all the rage in the loan market in recent weeks, among other reasons because they are “ringing alarm bells since they come on top of already high leverage and weak investor protections and against a backdrop of economic uncertainty.”

Having updated our calculation, the FT finds that in September a quarter (24% to be exact) of all new money raised in the US loan market has been used to fund dividends to private equity owners, up from an average of less than 4% over the past two years: that would be the highest proportion since the beginning of 2015, according to S&P Global Market Intelligence.

As we wrote a little over a week ago, while the loan market — where PE firms fund the companies they own by selling secured first, second, third and so on lien debt — had until recently not seen the same volume of issuance as other parts of the financial markets. That changed after the Fed stepped into the corporate bond market sending yields crashing to record lows, and forcing US investors into the last corner of the fixed income world to still offer some modest yields: leveraged loans. And since this is the domain of PE firms which desperately need to extract as much cash as they can from their melting ice cubes (another names for single-B and lower rated portfolio companies which will likely all be broke in the next 3-5 years), everyone is rushing to market with dividend recaps to pay as much to their equity sponsor as they can before the window is shut again.

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Leveraged Loans Blow Out. Distressed Corporate Debt Spikes, by Wolf Richter

Posted on March 23, 2020 | 1 comment

James Grant once said something to the effect that reaching for yield is more dangerous than reaching for razor blades in the dark. He was right, as the last few weeks have amply demonstrated. From Wolf Richter at wolfstreet.com:

This is the moment when yield-chasing turns into a massacre.

Leveraged loans – they’re issued by junk-rated overleveraged companies with insufficient cash flows – are part of the gigantic pile of risky corporate debt that is now being brutally repriced as concerns over credit risk (the risk of default) are finally bubbling to the surface. Since February 22, the S&P/LSTA US Leveraged Loan 100 Index, which tracks the prices of the largest leveraged loans, has plunged 20%:

The index is another example of how in these crazy times, when the most splendid Everything Bubble collided with the coronavirus, ever more financial metrics are violating the WOLF STREET beer mug dictumthat “Nothing Goes to Heck in a Straight Line.”

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$1.3 Trillion “Leveraged Loan” Boom Comes Unglued, by Wolf Richter

Posted on December 21, 2018 | Leave a comment

Leveraged loans are closely related to junk bonds, and its not a good sign when either market is coming “unglued.” From Wolf Richter at wolfstreet.com:

The Fed has warned about them, and investors fear a run-on-the-fund. 

The $1.3 trillion “leveraged loan” boom is coming unglued: Not because the junk-rated, highly leveraged, cash-flow-negative companies that issued these loans are massively defaulting – they’re not yet – but because investors are fleeing these instruments that had been super-hot for years, until October. They’re fleeing from loan mutual funds that hold these loans because they want to grab the “first-mover advantage” in an illiquid market; they want to be the first out the door before they get caught in a run-on-the-fund – with potentially catastrophic consequences for their cherished money.

These investors yanked a net of $3 billion out of US loan mutual funds and $300 million out of exchange-traded loan funds during the week ended December 19, in total $3.3 billion, the biggest outflow on record, according to Lipper. In the prior week, investors had yanked out $2.5 billion, which at the time had also been a record. It was the fifth week in a row of net outflows exceeding $1 billion, also a record.

Since the week ended October 31, the week all this started, the net outflow has reached $11.3 billion.

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Leveraged-Loan Risks Are Piling Up, by Wolf Richter

Posted on July 10, 2018 | Leave a comment

Yet another candidate for the sector of the debt market that gets the ball rolling on the next debt crisis. From Wolf Richter at wolfstreet.com:

Rising interest rates have a peculiar effect.

US junk-bond issuance in June plunged 31% from a year ago to just $14.5 billion, the lowest of any June in five years, according to LCD of S&P Global Market Intelligence. During the first half of the year, junk bond issuance dropped 23% from a year ago to $110.6 billion.

Is investor appetite for risky debt drying up? Have investors given up chasing yield? On the contrary! They’re chasing harder than before, but they’re chasing elsewhere in the junk-rated credit spectrum: leveraged loans.

Leveraged loans are another way by which junk-rated companies can raise money. These loans are arranged by banks and sold either as loans or as Collateralized Loan Obligation (CLOs) to other investors, such as pension funds or loan funds. They’re a $1 trillion market and trade like securities. But the SEC, which regulates securities, considers them loans and doesn’t regulate them. No one regulates them.

In the first half, companies issued $274 billion of non-amortizing leveraged loans, and $97 billion in revolving and amortizing leveraged loans, according to LCD, for a total of $371 billion, on par with the record set in the first half last year.

This is well over triple the amount of junk bonds issued in same period ($110 billion).

Many of these loans have floating interest rates, typically pegged to the dollar-Libor. And in an investment environment where the Fed has been trying to push up interest rates, Libor has surged, and floating-rate loans, whose interest payments increase as Libor ratchets higher, are very appealing to investors – despite the additional risks these higher interest payments pose for the companies that are already struggling with negative cash flows. LCD:

The U.S. leveraged loan market, which is accessed by speculative grade debt issuers, has been exceedingly hot over the past two years or so as investors pour money into the asset class in anticipation of rate hikes by the Fed. Such moves usually boost interest in floating rate asset classes.

Given the “sustained investor appetite” for this type of debt, companies have been able to issue these loans with lower spreads over Libor, making it cheaper for companies to borrow – until rates rise further. That’s when this debt gets more expensive for these companies that already have a high debt load, often combined with money-losing operations – the combination that gives them a non-investment grade or “junk” credit rating (my cheat-sheet on credit rating scales).

To continue reading: Leveraged-Loan Risks Are Piling Up

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When High-Risk Loans Blow Up, by Mike Larson

Posted on November 13, 2015 | Leave a comment

It’s not just bonds that are flashing red, so too is the leveraged loan market. From Mike Larson at moneyandmarkets.com:

Ever heard of the S&P/LSTA U.S. Leveraged Loan 100 Index? Probably not. But as an investor who cares about building or preserving wealth, you should definitely pay attention to the message it’s sending out.

To briefly explain: This index tracks the performance of 100 large, higher-risk, higher-yielding loans. They have a term of at least one year, are denominated in U.S. dollars and are issued on a senior secured basis.

These kinds of loans are typically used to finance leveraged buyouts, mergers and acquisitions or other corporate actions, all of which soar at the tail end of a credit cycle. They’re usually taken out by higher-risk companies with a lot of existing debt and lower credit ratings. As a result, they’re among the first loans to sour when the economy starts breaking down, credit conditions start tightening and easy money drains out of capital markets.

With that preamble out of the way, take a look at this chart of the index …

You can see that it topped out in mid-2014 — before the recent stock market struggles. You can also see it made a “lower high” in early 2015, and has done nothing but fall since then. As a matter of fact, it just hit the lowest level in more than three years.

To continue reading: When High-Risk Loans Blow Up

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And Now Defaulted Leveraged Loans Go Kaboom, by Wolf Richter

Posted on October 26, 2015 | Leave a comment

And the debt deflation beat goes on. From Wolf Richter at wolfstreet.com:

“It’s been a rotten year for distressed and defaulted loan paper.” That’s how S&P Capital IQ LCD starts out its report on leveraged loans.

“Rotten” may be a euphemism. So far, 2015 has been the worst year for defaulted “leveraged loans” since 2008 when the US financial system imploded under its own excesses.

Leveraged loans are the loan-equivalent to junk bonds. They’re issued by junk-rated over-indebted companies often to fund M&A – such as the loans issued by junk-rated, over-indebted Valeant – or to pay a special dividend to the private equity firms that own the companies, which is a form of financial strip-mining. They’re an $800-billion market and trade like securities. But the SEC, which regulates securities, considers them loans and doesn’t regulate them. No one regulates them. This gives issuers and banks a lot of leeway.

Leveraged loans are too risky for banks to keep on their balance sheet. Instead, they sell them to loan mutual funds or ETFs so that they can be moved into conservative retirement portfolios, or they repackage them into Collateralized Loan Obligations (CLO) to sell them to institutional investors, such as mutual-fund companies.

But banks can get stuck with them when markets come out of their euphoria, as they did during the Financial Crisis. So the Fed and other regulators have been exhorting banks for two years to back off. With some success: issuance has started to decline.

The “reach for yield” over the past few years, in an environment where the Fed’s zero-interest-rate policies have repressed yield, has turned investors into blind daredevils, taking on huge risks for ludicrously low returns. This allowed companies to issue leveraged loans at very low interest rates and as “covenant-lite,” with few of the protections that investors demand during saner times.

Even the Fed has fretted about “reach for yield” in numerous statements. It’s one of the most efficient wealth transfer mechanisms known to mankind. Wall Street knows exactly how to use it.

To continue reading: And Now Defaulted Leveraged Loans Go Kaboom

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