Breaking Down the Wall of Debt: The Leveraged Loan Market Meredith - - PDF document
7/14/2010 Breaking Down the Wall of Debt: The Leveraged Loan Market Meredith Coffey, EVP LSTA mcoffey@lsta.org www.lsta.org 1 Panel topics Brief review of where we have been Behind the rally (and retrenchment): The Virtuous and
1 Meredith Coffey, EVP – LSTA mcoffey@lsta.org www.lsta.org
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with a relatively low LIBOR spread
unrated & with a high spread*
mutual funds, CLOs, insurance companies, hedge funds, etc)
primary syndication
Source: Reuters LPC for primary lending; LSTA for secondary trading
*Traditionally LIB+150, increased to LIB+350 in 1Q09
Loan prices dropped more sharply than in the 2001-2002 downturn
There were multiple drivers to the downturn
Loan prices rallied back very sharply in 2009
Rally continued through April 2010, but then fell victim to global jitters 4 U.S. Index bid levels (2000-6/10)
Source: S&P/LSTA Leveraged Loan Index Bid (% of par)
U.S. Index bid levels (2009-6/10) U.S. Index bid levels (2010td)
60 65 70 75 80 85 90 95 100 105 1/7/2000 1/7/2001 1/7/2002 1/7/2003 1/7/2004 1/7/2005 1/7/2006 1/7/2007 1/7/2008 1/7/2009 1/7/2010 60 65 70 75 80 85 90 95 1/1/2009 3/1/2009 5/1/2009 7/1/2009 9/1/2009 11/1/2009 1/1/2010 3/1/2010 5/1/2010 7/1/2010 87 88 89 90 91 92 93 1/1/2010 1/22/2010 2/12/2010 3/5/2010 3/26/2010 4/16/2010 5/7/2010 5/28/2010 6/18/2010 7/9/2010
Loan default rate did hit record high
Default rate already dropping
Many companies exiting bankruptcy
But the recovery is more about technicals than fundamentals 5 S&P/LSTA Leveraged Loan Index default rate Default rate (%)
Source: Standard and Poor’s/LCD 0% 2% 4% 6% 8% 10% 12% 12/31/1998 4/30/1999 8/31/1999 12/31/1999 4/30/2000 8/31/2000 12/31/2000 4/30/2001 8/31/2001 12/31/2001 4/30/2002 8/31/2002 12/31/2002 4/30/2003 8/31/2003 12/31/2003 4/30/2004 8/31/2004 12/31/2004 4/30/2005 8/31/2005 12/31/2005 4/30/2006 8/31/2006 12/31/2006 4/30/2007 8/31/2007 12/31/2007 4/30/2008 8/31/2008 12/31/2008 4/30/2009 8/31/2009 12/31/2009 4/30/2010
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HY bond issuance revives in 2H09, accelerates in1Q10
Proceeds repay loans
HY issuance drops sharply in May 7 Monthly HY bond issuance
Source: Thomson Reuters LPC
5 10 15 20 25 30 35 40 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Volume ($Bils.)
HY market outstandings Change in outstandings (2009 vs. 2008; 5/10 vs 2009)
through May 2010
Outstandings ($Bils) Change in outstandings ($Bils.) Source: S&P/LCD, Merrill Lynch 200 400 600 800 1000 1200 1400 1600 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 YTD 5/31/2010 High-Yield Second-Lien Institutional First-Lien Institutional
50 100 150 200 First-Lien Institutional Second-Lien Institutional High-Yield Change (5/31/10 vs YE 2009) Change (YE 2009 vs. YE 2008)
Loan prices dropped more sharply than in the 2001-2002 downturn
There were multiple drivers to the downturn
Loan prices rallied back very sharply in 2009
Rally continued through April 2010, but then fell victim to global jitters 9 U.S. Index bid levels (2000-6/10)
Source: S&P/LSTA Leveraged Loan Index Bid (% of par)
U.S. Index bid levels (2009-6/10) U.S. Index bid levels (2010td)
60 65 70 75 80 85 90 95 100 105 1/7/2000 1/7/2001 1/7/2002 1/7/2003 1/7/2004 1/7/2005 1/7/2006 1/7/2007 1/7/2008 1/7/2009 1/7/2010 60 65 70 75 80 85 90 95 1/1/2009 3/1/2009 5/1/2009 7/1/2009 9/1/2009 11/1/2009 1/1/2010 3/1/2010 5/1/2010 7/1/2010 87 88 89 90 91 92 93 1/1/2010 1/22/2010 2/12/2010 3/5/2010 3/26/2010 4/16/2010 5/7/2010 5/28/2010 6/18/2010 7/9/2010
After a two-year hiatus, the U.S. institutional loan pipeline begins to fill
And then, PIIGS II strikes… 10
2 4 6 8 10 12 14 16 18 20 Mar Apr Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May June July
2009 2010 U.S. Institutional loan pipeline
Source: Thomson Reuters LPC
Volume ($Bils.)
After strong run up, both U.S. loan and HY bids slump
HY bond prices recovering, loan prices lagging 11 U.S. HY bond vs. inst. loan bids U.S. HY bond and inst. loan bids (Change from YE09)
Source: S&P/LSTA Leveraged Loan Index, Merrill Lynch Bid (% of par) Change in bid (pts)
1 2 3 4 5 6 1/4/2010 1/12/2010 1/20/2010 1/28/2010 2/4/2010 2/12/2010 2/22/2010 3/1/2010 3/9/2010 3/17/2010 3/25/2010 4/5/2010 4/13/2010 4/21/2010 4/29/2010 5/7/2010 5/17/2010 5/25/2010 6/2/2010 6/10/2010 6/18/2010 6/28/2010 7/6/2010 BAML US HY Price S&P/LSTA Index Price 86 88 90 92 94 96 98 100 102 1/4/2010 1/12/2010 1/20/2010 1/28/2010 2/4/2010 2/12/2010 2/22/2010 3/1/2010 3/9/2010 3/17/2010 3/25/2010 4/5/2010 4/13/2010 4/21/2010 4/29/2010 5/7/2010 5/17/2010 5/25/2010 6/2/2010 6/10/2010 6/18/2010 6/28/2010 7/6/2010 BAML US HY Price S&P/LSTA Index Price
Issuance drops sharply in HY bond market following Euro-jitters
U.S. institutional loan issuance drops, but market remains open…at a price 12
5 10 15 20 25 30 35 40 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Inst loans HY bonds
U.S. HY bond vs. inst. loan issuance Volume ($Bils.)
Source: Thomson Reuters LPC
Following May pullback, U.S. institutional loans flex up (by considerable amount) to clear market 13
1 2 3 4 5 6 7 8 9 Talk Print OID over 3 yrs Spread Floor
U.S. institutional flex activity Pre- and post-flex yields on loans that flexed in May 2010 Volume ($Bils.) Yield (%)
Source: Thomson Reuters LPC Source: S&P/LCD
5 10 15 1Q08 2Q083Q08 4Q08 1Q092Q09 3Q09 4Q09 1Q10 2Q10 Down Up
U.S. Institutional yields increase considerably in May, June 2010 14
100 200 300 400 500 600 700 1Q98 Mar-99 Sep-99 Mar-00 Sep-00 Mar-01 Sep-01 Mar-02 Sep-02 Mar-03 Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Libor Floor Benefit Upfront fee over 3Y mat Straight Spread 100 200 300 400 500 600 700 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 ME 6/3/10 Libor Floor Benefit Upfront fee over 3Y mat Straight Spread Source: Standard and Poor’s/LCD
U.S. institutional loan spreads (with OID, LIBOR floor) U.S. institutional loan spreads (with OID, LIBOR floor) Spread (bps) Spread (bps)
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Refinancing cliff has shrunk
Maturities (through amend & extends) have been pushed off materially 16 U.S. Refi cliff (April 2009 vs. June 2010) Change in refi cliff (April 2009 vs. June 2010)
Source: S&P/LSTA Leveraged Loan Index Volume($Bils) Volume($Bils) 50 100 150 200 250 2009 2010 2011 2012 2013 2014 2015 2016 2017 April 2009 est refi needs June 2010 est refi needs
20 40 60 2009 2010 2011 2012 2013 2014 2015 2016 2017
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50 100 150 200 250 2009 2010 2011 2012 2013 2014 2015 2016 2017 Original cliff Less defaulted loans Less defaulted loans and HY repmts
Refi need analysis (July 2009)
Original cliff has $576B of loans (red)
If half B-, all CCC’s and D’s default out, cliff shrinks to $421B (blue)
If loans default out and HY paydowns occur, cliff shrinks to $344B (green)
If loans default out, HY paydowns occur and loan maturities are extended, cliff remains at $344B, but flattened (purple)
ACTUAL RESULT: Cliff still larger, but shape reflects estimates
Volume of loans ($Bils.) Source: S&P/LCD, LSTA
Est “optimist” cliff in 2009 vs. cliff in 2010
50 100 150 200 250 2009 2010 2011 2012 2013 2014 2015 2016 2017 May 2009 est cliff (less defaulted loans, HY bond repmts and A&Es) June 2010 est refi needs
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50 100 150 200 250 2009 2010 2011 2012 2013 2014 2015 2016 2017 D CCC+ to CC B- B+/B >= BB- NR
Expected refinancing schedule (July 2009)
Charts show refi cliff by rating (assuming loans must refi one year prior to contractual maturity)
In 2009, the refi cliff was fairly front loaded
In 2010, refi cliff is smaller – and more back-ended
Volume of loans ($Bils.) Source: S&P/LCD, LSTA
Expected refinancing schedule (July 2010)
50 100 150 200 250 2010 2011 2012 2013 2014 2015 2016 2017 D CCC+ - CC B- B+/B >= BB- NR
It is the better rated companies that have been doing most of the Amends-to-Extends
B+ and better cos account for 53% of A2Es, and just 30% of index
This could leave weaker companies facing an earlier refinancing 19
0% 5% 10% 15% 20% 25% 30% 35% >= BB- B+ B B- <=CCC+ NR Index (end June) A2Es (end April)
Distribution of ratings: A2E companies vs. index
Share of deals (%) Source: S&P/LCD, LSTA
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10 20 30 40 50 60 70 80 90 50 100 150 200 250 300 350 400 450 19981999200020012002200320042005200620072008 CLO issuance Total institutional loan iss. (incl refis, repricings) Inst issuance ($Bils.) Source: Thomson Reuters LPC, S&P/LCD
Institutional loan, CLO issuance
Institutional market growth enabled by CLO growth
Severe dislocation in CLOs and institutional loan market in 2008
CLO issuance stops, but existing CLOs still recycle paydowns into loans
CLO issuance ($Bils.) 0% 10% 20% 30% 40% 50% 60% 70% 80% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1H10 Bank CLO Fin co Hedge, Dist., HY fund Ins co
Investor market share
Market share (%)
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100 200 300 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Cumulative decrease in demand as reinvestment period ends Cumulative CLO
CLO issuance peaked in 2007 (Outstandings in red)
CLO reinvestment periods range 5-7 years (Blue reflects “frozen” amt of CLOs as reinvestment ends)
As reinvestment periods end, CLOs will no longer be able to buy new loans
In turn, “re-investible” dollars will decline
Blue line reflects MAXIMUM “reinvestible” CLO dollars – eg, if all loans in CLOs are repaid
In reality, reinvestible dollars will be much lower
Volume ($Bils.)
CLO issuance vs. CLOs going static Theoretical CLO reinvestment capacity
Volume ($Bils.) 50 100 150 200 250 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Max reinvestible $ Source: LSTA,S&P/LCD, Intex, Wachovia
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Assumes roughly 52% of performing loans are in CLOs based on size of CLO market and default rates
Refinancing gap between loans held by CLOs and CLO refi capacity is smaller
There remains a nearly $100B gap in 2012
Manageability may revolve around health of HY bond market , revival of CLOs and ability to attract new investors Maturity profile of CLO loans vs. CLO refi capacity
Volume($Bils) Source: S&P/LSTA Leveraged Loan Index, LSTA, Wells Fargo, Intex 20 40 60 80 100 120 2010 2011 2012 2013 2014 2015 2016 2017 Est performing loans held in CLOs CLO total refi capability (all reinvested)
Source: Standard & Poor’s LCD, S&P/LSTA Leveraged Loan Index, Wells Fargo, Intex
Share of U.S. CLOs in sub. OC violation
Share of CLOs (%) 0% 10% 20% 30% 40% 50% 60% 10/01/08 11/12/08 12/16/08 01/26/09 02/24/09 04/06/09 06/04/09 07/31/09 10/01/09 11/19/09 12/31/09 02/05/10 03/09/10 04/01/10 05/04/10 30 40 50 60 70 80 90 09/01/08 11/01/08 01/01/09 03/01/09 05/01/09 07/01/09 09/01/09 11/01/09 01/01/10 03/01/10 05/01/10
Bid (% of par)
Nearly all securitized products have seen their AAA tranches downgraded
However, as of November 2009, 95% of CLO liabilities originally rated AAA remain rated A or better
More than 90% of SF CDO AAAs are rated below IG
True CF CLOs have not suffered uncured EODs 24
0% 10% 20% 30% 40% 50% 60% AAA AA A BBB BB B CCC CC C WR NR CLO AAA TRUP CDO AAA ABS CDO AAA
CDO AAA rating transition
Share of liabilities tranches originally rated AAA Source: Wells Fargo, Moody’s Investor Service
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50 100 150 200 250 Same amt of equity Half the equity Quarter the equity Debt Equity
26 CLO outstandings and estimated equity component With less leverage, total size of CLOs shrinks
CLO outstandings ($Bils) Hypothetical new CLO outstandings ($bils.) Source: LSTA, Wachovia, Intex
Securitizer may be the structurer (who is just an agent of the manager and may exit the business rather than hold 5%)
Some CLO managers can find a way to hold 5% of the equity slice, but many cannot; almost none can hold a vertical pro rata slice
“Originator” – who makes a loan and sells it directly or indirectly to an ABS (CLO) may have to retain 5% of the loan. This may force changes to trading docs to prohibit sales to CLOs; it may disrupt the entire trading market.
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