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Why leveraged loan issuance remains weak yet steady

US Leveraged Loan Market Volumes 2013-07-01Enlarge GraphLeveraged loan issuance remains depressed, though not as badly depressed as the high yield bond market

The weekly leveraged loan issuance for the week ended June 28, 2013, was $9.9 billion across 15 deals, which is on the lower end of the c. $9.5-13.5 billion weekly volumes we’ve seen over the past month. While leveraged loans saw a decrease of ~30-40% of weekly volumes, the high yield bond volume dropped ~75%.

Issuance overwhelmed by Valeant deal

The Valeant Pharmaceuticals deal accounted for $3.2 billion, which is the largest term loan since the Heinz transaction. The deal included another $3.2 billion in high yield bonds, an $850 million Term Loan A (a syndicated bank loan), and another $2.3 billion in equity. The company will use the proceeds to buy Bausch & Lomb. The original price talk was L+325-350 basis points, but ended up pricing 50 basis points higher, with an additional 1% discount.

The deal certainly overstretched the market, and bankers advising other in-market issues likely decided to postpone pricing to avoid competing with Valeant. Investors pushed back hard on terms, causing 16 deals in market to revise to a higher price talk and get rid of any cov-lite1 structures in favor of loans with complete maintenance covenants2.

Loans close higher

The leveraged loan market closed marginally higher for the week—approximately 0.5% higher according to the LCDX index—yet the leveraged loan ETFs (exchange-traded funds SNLN and BKLN) didn’t increase as much. However, this week, the ETFs are performing much better.

In the medium term, interest rates will move higher and spreads may stop widening (spreads widened 50 basis points in June), which will benefit loans. On the other hand, the asset may lose its appeal to other asset classes such as equities if the market recovers, which will reduce price support.

  1. Covenant-lite issuances are loans with high yield bond style covenants (financial metric tests) that don’t need to be tested periodically.
  2. Maintenance covenants are financial metrics that must be met quarterly, reducing the flexibility for the issuer but reducing the risk for the lenders

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