US Leveraged loan market analysis – January 2012

Market technical bias improved during the 2011 home stretch, but conditions remain fragile. Looking ahead, visibility is low, with the capital markets still tracking Eurozone instability.

Welcome to sp capital iq’s monthly loan market overview clip i’m steve miller a member of the leverage commentary and data team over the next few minutes we’ll review recent market trends and discuss the outlook for the next 90 days in preview the markets technical bias improved during the homestretch of 2011 though conditions remain fragile looking ahead visibility

Is low with the capital market still tracking the vicissitudes of europe’s erratic debt situation the spls da index closed out 2011 with a half a percent game in december bringing a quiet conclusion to a topsy-turvy year as this slide shows after a steady first-half loan returns plunged into the red in august in response to a run of bad news that set up a strong

October rally sparked by better-than-expected third-quarter economic growth in the us and a positive turn in europe’s sovereign debt talks the 2011 rollercoaster ride was hardly unique to the loan market risk assets generally followed europe’s ever changing fortunes which shifted regularly and with great effect the fourth quarter comeback pushed loan returns

For all of two thousand eleven to one point five percent compared to 10.1 percent in 2010 still it was the spls da indexes thirteenth gain in its 14-year history the only down year of course remains 2008 twenty-nine percent swoon the loan markets technical equation came into balance in the fourth quarter after veering from strongly positive in the first half

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To sharply negative in august in september over the final three months of the year anemic demand faced off against lackluster supply start with demand between october and december outflows from lone mutual funds moderated while cielo volume perked up to a post credit crunch high of 4.4 billion on the other side of the ledger new issue institutional volume fell

In the fourth quarter to a two-year low of 26 billion dollars looking ahead the prospects for loan volume in early 2012 are uninspiring arrangers have reined in underwriting commitments in the face of uncertain demand as a result lcds forward calendar of ma related deals fell to an 11-month low a 4.6 billion at year-end until conditions improve most participants

Expect the loan market to continue to operate as it did in the fourth quarter when the new issue window opened and narrowed frequently in response to shifting investor sentiment that will likely limit volume of large lbos for the time being and keep activity centered on middle market deals tuck-in acquisitions extensions and refinancings with demand and supply in

Equilibrium secondary loan levels were range bound in december federated credits bolstered by clo and bank demand outperform during the final month of the year as did hi bata names it appeals a relative value accounts distressed paper meanwhile limped to the finish with triple c rated loans losing nearly a point in december similarly the average new issue clearing

Yield moved sideways in december after narrowing significantly in november while yields were unmoved no fewer than to issuers were able to strip maintenance covenant tests as a result of strong primary demand 99-cent stores and capital safety looking ahead participants think the market will remain bifurcated with bb loans clearing routinely inside a five percent

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While single be paper prints in a six to seven percent band the loan default rate ended 2011 at a near record low of 17 basis points down from one point nine percent a year earlier looking ahead managers expect the rate to rise to around 2% in 2012 as a result of some difficult situations and the media and publishing sectors that compares to a three-point-five

Percent historical average needless to say if the eu situation deteriorates the pain will increase forcing default rates higher still to wrap up a few final points participants expect to slow start to 2012 with activity centered on middle market deals tuck-in acquisitions and prorated of paper further out as the eu goes so will likely go loan market activity again

This point is not exclusive to loans with this in mind arrangers expect the loan market to continue to follow the bond markets playbook with a window for new deals opening when investor sentiment improves and narrowing when investors are spooked improving conditions breathe some life into the amend to extend trade in december indeed michael stores and cronus were

The first to institutional loan issuers to tap the market for extensions since june arrangers expect issuers with two thousand thirteen and fourteen loan maturities to test the market for extensions in early in the year based on michaels and chronos the cost of extending today is roughly 100 basis points wider than it was in early 2011 when liquidity was flowing

That brings us to the end of our overview for more information on the loan market you can check in with us on the web or via linkedin twitter or facebook the links for each is in the description below you can also download this presentation at finally here’s our standard disclaimer you

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Transcribed from video
US Leveraged loan market analysis – January 2012 By Steve Richardson