Why did trends diverge for corporate borrowers?

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Part 8
Why did trends diverge for corporate borrowers? PART 8 OF 9

Collateralized loan obligation deals mark a record quarter

Leveraged loan issuance in the primary market for the week ended June 27

The week ended June 27 saw a total of ~$14.3 billion issued in the leveraged loans (BKLN) primary market in 21 transactions. Compared to the previous week, both issuance volumes and the number of deals were up. In the week ended June 20, there were 12 deals in the leveraged loans (SNLN) primary market. Issuance came in at ~$12 billion (Source: S&P Capital IQ/LCD).

Collateralized loan obligation deals mark a record quarter

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Collateralized loan obligation deals

There were five collateralized loan obligation (or CLO) deals for total issuance volumes of ~$2.5 billion in the week ended June 27. This was up from four deals with issuance volumes of ~$2.4 billion in the week ended June 20. Including last week’s figures, the total number of CLO deals in 2014 now comes to 112 for issuance amounting to $60.1 billion. Last week’s figures also brought a new record for CLO issuance. The second quarter of 2014 recorded the highest levels of issuance in the CLO space ever—at $32.3 billion.

Issuers have taken advantage of low yields and funded their borrowing requirements. Another key trend has been refinancing existing debt obligations with lower-cost debt. The cheaper cost of debt has also given rise to acquisition activity among corporate borrowers—both through mergers and acquisitions and through leveraged buyouts (or LBOs).

In the week ended June 27, three issuers stepped into the leveraged loans market to seek financing for LBOs for a total issuance volume of ~$2.0 billion. These included TGI Friday’s $620 million two-tranche term loan financing package. The purpose of the issue was to fund the Sentinel Capital Partners– and TriArtisan Capital Partners–backed LBO of the company.

Another major transaction that will finance an LBO deal was Internet Brand’s $680 million issue. Proceeds from the deal are earmarked for Kohlberg Kravis & Roberts’ (KKR) LBO of the corporate.

Other major deals last week included Husky International’s $1.6 billion two-tranche cov-lite transaction. The proceeds of this deal will go towards refinancing the company’s existing debt obligations.

What are leveraged loans?

A leveraged loan is a commercial loan provided by a group of lenders. Typically secured, the loan is structured, arranged, and administered by investment and commercial banks (the arrangers)—like JPMorgan. It’s then syndicated to other banks or institutional investors.

The interest rate on leveraged loans is floating and paid as a spread over an interest rate benchmark such as LIBOR. Interest rates on LLs are usually paid at or above LIBOR + 1.25%. Leveraged loans are issued by companies rated below investment-grade, like Sallie Mae.

Key trends

In the next part of this series, you’ll find an analysis of key secondary market trends in leveraged loans and compare them to the S&P 500 (SPY) and high-yield debt (HYG).


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