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Share of covenant-lite loans jumps to post-crisis high in April

In April, covenant-lite loans reached a post-credit-crisis milestone by capturing 40% of total institutional new-issue volume, the most since November 2007.

Viewed through a wider lens, however, the trend is less dramatic. Covenant-lite loans represent a more modest 22% of 2012 volume (as of May 16), down from 27% during the comparable period in 2011, when market conditions were even more robust.

For this reason, the percent of S&P/LSTA Index loans that are covenant-lite has increased just slightly, to 24.3% as of May 11, from 24.1% at year-end.

Of course, covenant-lite activity, like clearing yields, generally tracks the market. Therefore, arrangers expect incurrence-test-only loan activity to continue apace in the near term as paper forged in the hothouse conditions of February and March rolls into the market. Indeed, the forward calendar is dominated by such loans.

Further out, participants speculate that the recent cooling in the primary market may put a damper on covenant-lite activity, for obvious reasons.

Covenant-lite stats 
On an apples-to-apples basis, arrangers say issuers pay a small premium to avoid maintenance tests – after all, financial covenants are effectively a repricing option that lenders can exercise if an issuer’s financial heath declines. Participants estimate the premium at 25-50 bps. The only evidence, though, is circumstantial: in late April, Schrader International’s $235 million, six-year first-lien term loan cleared at a roughly 50 bps premium to talk – L+500/1.25%/98, versus L+450-475/1.25%/98.5 – after the B/B2 issuer stripped covenants. However, sources speculate that had Schrader approached investors with a covenant-lite deal initially, it might have seen a tighter execution.

The truth, though, is that no one really knows how much more issuers pay to avoid maintenance tests. Here’s why:

In time-honored fashion, the recent batch of covenant-lite loans skews toward the more desirable issuers. That is apparent in clearing yields, what with incurrence-test-only loans printing, on average, inside loans with maintenance tests.

Even controlling for rating, this pattern holds true, suggesting that within a credit-quality bracket, issuers that are more creditworthy command both better spreads and looser structures.

Other highlights:

  • Add-on paper represents a disproportionate amount of covenant-lite loans, at 22%, versus 7.7% for covenant-heavy loans.
  • Covenant-lite structures remain less prominent in the middle market, accounting for 11% of 2012 volume for issuers with $50 million of EBITDA or less, versus 22% for loans to larger borrowers.

Historical performance 
Perhaps because stronger issuers have the muscle to avoid maintenance tests, covenant-lite loans have generated superior returns. Since January 2006 – the first date for which there is a statistically significant sample – covenant-lite S&P/LSTA Index loans outperformed covenant-heavy loans, at 39.28% to 36.36%. The pattern has held in 2012, with incurrence-test only loans ahead 5.18% to 4.86% as of May 14.

These statistics are even more remarkable considering that among loans outstanding as of Dec. 31, 2007, 23% have since has covenant amendments that pushed spreads up an average of 198 bps. In comparison, only 9% of covenant-lite loans have been repriced higher since that date via a waiver or amend-to-extend.

The reason for the return gap is simple: covenant-lite loans have enjoyed a lower default experience over time – another sign of positive bias in the sample. Of the S&P/LSTA Index loans that were outstanding at year-end 2007, just before the default rate spiked, 9.3% of covenant-lite loans have defaulted, versus 14.7% of covenant-heavy loans. And the gap may grow further still. After all, TXU, the biggest potential pending defaulter by a wide margin, has a covenant-heavy loan.

As for recovery levels, there doesn’t seem to be any daylight between covenant-lite and covenant-heavy loans. Take the average price of loans at default. Since 2007, the average for covenant-lite loans is 52.3 cents on the dollar, one cent inside the 53.3 average for covenant-heavy loans. – Steve Miller

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Global Brass high yield bonds price wide of talk, at par, to yield 9.5%

Global Brass and Copper this morning completed an offering of secured notes via bookrunners Goldman Sachs and Morgan Stanley, sources said. Terms on the B/B3 debut in market by the metals fabricator were inked 12.5 bps wide of guidance amid the tough market climate this week, and the call protection was pushed out to the normalized four years at par plus half coupon, from non-call three, but the $375 million target was met, sources note. Proceeds are earmarked for repayment of the company’s term loan and to fund a dividend to shareholders. It’s a second dividend deal from the firm following a $43 million payment to the sponsor KPC Capital Partners via a loan-market execution in 2010. Terms:

Issuer Global Brass and Copper
Ratings B/B3
Amount $375 million
Issue secured notes (144A)
Coupon 9.5%
Price par
Yield 9.5%
Spread T+836
FRN eq. L+808
Maturity June 1, 2019
Call nc4
Trade May 23, 2012
Settle June 1, 2012 (t+5)
Books GS/MS
Px talk 9.25% area
Notes revised from nc3

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Mastro’s Restaurants high yield bonds price at par to yield 12%; terms

Mastro’s Restaurants today completed an offering of secured notes via sole bookrunner Jefferies, according to sources. Terms were inked at talk and at the target size. The coupon pays 12% in cash plus 3% in-kind until the company achieves LTM consolidated cash flow of at least $20.4 million for two consecutive quarters, according to sources. Proceeds from the deal will be used to repay existing 9.25% secured notes due 2014, a $100 million issue placed in 2007 to back the sale of the restaurant chain to Kinderhook Capital, Soros Strategic Partners and management. Notes are currently callable at 102.31. Mastro’s operates steakhouses and seafood restaurants in California and Arizona as well as Chicago and Las Vegas. Terms:

Issuer Mastro’s Restaurants / RRG Finance
Ratings B-/Caa1
Amount $102 million
Issue secured notes (144A-life)
Coupon 12.00% (+3% PIK)
Price 100
Yield 12.00%
Spread n/a
FRN eq. n/a
Maturity June 1, 2017
Call nc2.5
Trade May 18, 2012
Settle May 24, 2012 (T+4)
Joint Bookrunners Jeff
Co-Leads
Co’s.
Px talk 12% cash, 3% PIK
Notes w/ three-year equity clawback for 35% @ 112; carries T+50 make-whole; w/ change-of-control put @ 101; 1st call @ par +75% of coupon; 3% PIK tied to cash flow.
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European high yield bond, leveraged loan trading markets follow equities lower

With Ascension Day in continental Europe yesterday, the secondary high-yield and leveraged loan markets werew quiet, although tone has been more constructive than earlier in the week, according to sources.

While bits and bobs traded, the secondary loan market was steady. In post-break trading, Grohe’s €175 million (E+550 with 1.25% floor) TLB softened slightly from 99.25 on the break and 98.5 at reoffer, sources said, although the loans are slightly higher today and wrapped around 98.5 given the firmer tone in the secondary, according to sources.

Although Greece’s elections on June 17 have been marked in the diary, situations around loan borrowers continue to develop. Market players are expecting launches from Alain AfflelouBravida, and Global Blue, while KMDBirds Eye Iglo, and BSN Medical are being worked on in the background. New Look’s full amend-to-extend request is said to be imminent, while Vivarte’s final deadline is Friday.

In high-yield, trading activity has been kept at bay due to the state of paralysis that has set in. Moves in either direction are expected to be amplified, as is often the case while the macro picture remains uncertain, and the market lacks a clear direction. The last deal to price in high-yield – Schmolz & Bickenbach 9.875% notes due 2019 – are wrapped around 97.5 and half a point lower from break, but still higher than the 96.957 reoffer. Carlson Wagonlit 7.5% notes due 2019 are a point softer from par reoffer, and quoted at a mid-price of 99.

Kerling 10.625% notes due 2017 are unchanged at a mid-price of 93 today ahead of the company’s conference call tomorrow afternoon to discuss its first-quarter results. EBITDA for the quarter was €40 million, versus €37 million in the first quarter of 2011, while full-year 2011 U.K. GAAP EBITDA was €193 million. Performance in the chlorvinyls business improved, European PVC prices increased amid stable demand, and caustic demand showed signs of improving, the company said. Net cash flow from operating activities was €51 million, and the group was in compliance with its financial covenants as of March 2012. –Sohko Fujimoto

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Frontier Communications notes price at par to yield 9.25%; terms

Frontier Communications late yesterday completed an offering of senior notes via bookrunners Deutsche Bank, Barclays, Morgan Stanley, and RBS, according to sources. Pricing came at the midpoint of talk and at the target size of $500 million despite heavy market conditions. The wireline operator returns to market after two years for funds to back a $500 million tender offer targeting portions of its $600 million issue of 8.25% notes due 2014 and $500 million issue of 7.875% notes due 2015. Terms:

Issuer Frontier Communications
Ratings BB/Ba2
Amount $500 million
Issue senior notes (off the shelf)
Coupon 9.25%
Price 100
Yield 9.25%
Spread T+774
FRN eq. L+753
Maturity July 1, 2021
Call nc-life
Trade May 12, 2012
Settle May 22, 2012 (T+3)
Joint Bookrunners DB/Barc/MS/RBS
Co-Leads
Co’s.
Px talk 9.25% area
Notes carries T+50 make-whole call; w/ change-of-control put @ 101.

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Momentive Performance notes price at par to yield 10%; terms

Momentive Performance Materials today completed an offering of intermediate-lien (1.5-lien) notes via bookrunners J.P. Morgan, BMO, Bank of America, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, Morgan Stanley, and UBS, according to sources. The deal was cut in half, from $500 million, and terms were inked at the midpoint of revised talk after it was widened post-launch from 9.25% area. Proceeds were aimed at repaying approximately $250 million of term loans, funding a tender offer for up to $130 million of the $200 million outstanding of 12.5% second-lien notes due 2014, and for general corporate purposes. It is unclear what changes will be made in regard to the $250 million downsizing. Notably, if the tendered notes fall short of the $130 million target, the company has the option to redeem some of the new notes up to the shortfall amount, at par plus accrued interest, within 30 days of closing. Terms:

Issuer Momentive Performance Materials
Ratings B-/B2
Amount $250 million
Issue intermediate-lien notes (144A)
Coupon 10%
Price 100
Yield 10%
Spread T+868
FRN eq. L+842
Maturity Oct. 15, 2020
Call nc3.5
Trade May 17, 2012
Settle May 25, 2012 (T+6)
Joint Bookrunners JPM/BMO/BAML/Citi/CS/DB/GS/MS/UBS
Co-Leads
Co’s.
Px talk 10% area (initial 9.25% area)
Notes 1st call @ pat +75% of coupon; downsized by $250 million.
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Momentive offers price guidance on upsized secured notes drive-by

Momentive Performance Materials is in the market with 8.5-year (non-call 3.5) intermediate-lien (1.5-lien) notes, and price talk is in the 9.25% area, according to sources. Books closed at 4:30 p.m. EDT yesterday, with pricing is expected late May 16, the sources add. The offering has already been upsized amid strong demand by $50 million, to $500 million, sources note.

Bookrunners on the deal are J.P. Morgan, BMO, Bank of America, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, Morgan Stanley, and UBS. Proceeds will be used to repay approximately $250 million of term loans, to fund a tender offer for up to $130 million of the $200 million outstanding of 12.5% second-lien notes due 2014, and for general corporate purposes, according to the firm..

Ratings came in as expected, at B-/B2. Additionally, S&P assigned a 4 recovery rating to the deal indicating expectations for average (30-50%) recovery in the event of a payment default.

Under the terms of the tender, bondholders are offered total consideration per note of $1,072.50, which includes a $10 premium for notes delivered by the consent deadline of 5:00 p.m. EDT on May 30. Notably, if the tendered notes fall short of the $130 million target, the company has the option to redeem some of the new notes up to the shortfall amount, at par plus accrued interest, within 30 days of closing, according to the company.

This latest effort follows a term loan refinancing for the issuer in March. Momentive Performance Materials then completed a $175 million add-on to its extended term loan due 2015 (L+350) to repay roughly $175 million of unextended covenant-lite term debt. – Staff reports

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JC Penney bonds, shares trade lower after 1Q results miss estimates


J.C. Penney Company
 shares were trading down 13.5% yesterday, at $28.80, and its 5.65% notes due 2020 are changing hands three points lower, at 94, after the company reported first-quarter results that missed Street estimates, according to trade data.

Comparable-store sales for the first quarter ended April 30 fell 19% and total sales were down 20% versus the year-ago period, at $3.15 billion, according to SEC filings. The S&P Capital IQ consensus mean estimate was for $3.42 billion, so results came in nearly 8% lower.

And S&P Capital IQ calculates EBITDA at $77 million in the quarter, versus consensus estimate for $163 million. That works out to a 53% miss.

Management admitted “sales and profitability have been tougher than anticipated,” but argued the business transformation under the new JCP branding and merchandise presentation is ahead of schedule.

Five-year CDS in the name widened 25 bps yesterday, to 560/580, according to sources. And note that compares to a 315 bps context in mid-March at the market peak and roughly 450 bps on Monday ahead of the earnings report Tuesday after the equity market close.

J.C. Penney issued the $400 million of 5.65% notes two years ago in an effort to bolster pension-plan funds. As reported, issuance was at 99.7, to yield 5.7%, via Barclays, Bank of America, J.P. Morgan, and Wells Fargo.

In February, the issuer converted its $1.25 billion secured revolver into an asset-based revolver of the same size under an amendment, according to a regulatory filing. The April 29, 2016 maturity date and pricing grid, which ranges from L+200-300 based on J.C. Penney’s ratings, were unchanged. J.P. Morgan, Bank of America Merrill Lynch, Barclays Capital, and Wells Fargo acted as joint bookrunners. J.P. Morgan is administrative agent. – Matt Fuller

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Muzinich & Co to launch high-yield, long-short hedge fund

Muzinich & Co is set to launch a high-yield, long-short hedge fund. Returns will be generated through a four-pronged strategy – a long book, a short book, short maturity bonds, and credit arbitrage.

The long book will focus on opportunities for capital appreciation – be it names forecast to show credit improvement, a ratings upgrade or to benefit from asset sales and equity infusions. The short book looks to take advantage of likely price falls on names trading at a high price, be it through a liquidity or macro-related event, or ratings downgrade. The short maturity book will focus on bonds with near-term maturities with a clear path to repayment. Leverage is used in the short maturity book to generate extra income. The credit arbitrage book generates alpha by identifying securities that are perceived to be mispriced against each other.

The fund currently has roughly $50 million of external capital committed by investors, and while no specific date has been agreed, it is expected to launch in the near term.

The fund will invest predominantly in dollar-denominated assets, but will also invest in euro-denominated holdings. The fund is lead-managed by Clinton Comeaux and Jason Horowitz, who are supported by a team of more than 15 investment professionals, including portfolio managers and analysts.

Commenting on why the high-yield asset class is well-suited to the strategy, a Muzinich & Co presentation notes that 35% of the bonds in the high-yield universe returned less than 0% or more than 10% in 2011, and this large dispersion of returns allows value to be generated on both the long and short sides. Furthermore, volatility has increased dramatically post Lehman Brothers, and this leads to market dislocation from which a hedge fund can benefit.

The presentation also comments that the strategy will benefit from the large coupons in high-yield (the average high-yield coupon is roughly 8%) and that over the last 21 years, the U.S. high-yield cash pay market (as measured by BofA ML US High Yield, Cash Pay – J0A0) generated an annualised return of 9%.

The new fund will be based on an existing investment strategy that Muzinich & Co. sub-advises for Deutsche Bank on the X-markets platform – the dbx-High Yield 1 Fund. It was set up in 2004. – Luke Millar

 

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High yield bond prices hit 3-week low, largely due to Chesapeake

The average bid of high-yield flow-name bonds in the secondary market dropped 73 bps over the past three trading sessions, to 100.99% of par, yielding 7.61%, according to LCD, a division of S&P Capital IQ.

This is the largest single negative reading in the twice-weekly report dating back 5.5 weeks. As well, it puts the average at a three-week trough, or, rather, the lowest average price since the 100.48 reading on April 24.

Moreover, the decrease builds on Thursday’s 18 bps slump, for a net 91 bps decline week over week. Looking back two weeks, the average is down 111 bps. The average is up 40 bps over the past four weeks, however, due to the late-April gains.

Market weakness in recent days is tied to renewed concerns about Europe and the potential for Greece to leave the EU, as well as misunderstandings in the $2 billion of J.P. Morgan risk-management losses via synthetic credit trading. As well, several more issuers have reported weaker-than-expected first-quarter losses in recent days, spurring sell-offs in spots, and Chesapeake Energy continues to weigh heavily on the average.

Indeed, Chesapeake was once again the largest decliner amid the ongoing controversy surrounds the CEO and asset-sale delays by the issuer. Without the four-point slump in Chesapeake 6.125% notes, to 91, the average would have shown roughly half of the decline in today’s measurement.

The current reading at 100.99 is up 406 bps in the year to date, but is 253 bps short of the 2012 peak of 103.52 recorded on March 2.

With the solid decline in the average price today, the average yield is surged 15 bps, to 7.61%, and the average spread-to-worst widened 19 bps, to T+644, or L+607, swap-adjusted.

While the average yield is at a three-week high, consider that the average yield has only twice broken out of a 7-8% band all year, once at 8.03% on Jan. 3, and again at 8.16% on Jan. 17, according to LCD.

For reference, the averages at the 2012 peak on March 1 were 7.15%, T+574, and L+549, respectively, while levels at a trough in October were 10.4%, T+903, and L+868, respectively. – Staff reports

The data:

  • Bids decrease: The average bid of the 15 flow names declined 73 bps, to 100.99.
  • Yields increase: The average yield-to-worst surged 15 bps, to 7.61%.
  • Spreads increase: The average option-adjusted spread to Treasuries widened 19 bps, to T+644, or L+607, swap-adjusted.
  • Gainers: There were no gainers this week.
  • Losers: The largest of the 10 decliners was Chesapeake Energy 6.125% notes due 2021, which plunged four points, to 91.
  • Unchanged: Five issues were unchanged.